Property Appraisal | What Buyers And Sellers Need To Know
A real estate property appraisal is an unbiased estimate of the fair market value of a home as determined by a licensed and qualified appraiser. This assessment is usually required when buyers apply for a mortgage loan, as lenders need to know how much the property is worth before approving a loan.
While it is true that the value of a home is what someone is willing to pay for it. Banks and other lenders require a more formal evaluation to minimize their risk. No matter how much the buyer is willing to pay for the property, the bank will only lend money based on the appraised value.
How is the appraised value determined?
A typical real estate appraisal begins with the appraiser visiting the property in person to take measurements, take photographs, and assess the property's condition inside and out. The appraiser will also research recent sales of similar properties in the area, known as comparables or comps, and any public records related to the appraised property.
After completing their research, the appraiser will compile all their findings into a detailed report that includes the estimated value of the property. If you're obtaining a loan to buy a home, your lender will order the appraisal and provide you with a copy of the report.
What factors influence an appraisal?
There are numerous factors that influence an appraisal, but some common ones include:
- Location of the property
- Size and number of bedrooms and bathrooms
- Age and condition of the home
- Recent renovations or upgrades made to the home
What happens when a house does not appraise for the sales price?
In a multiple-offer situation, there is always a risk that the high bidder's offer is more than the appraiser determines the house is worth. In this case, buyers and sellers have a few options, including:
- Walk away. The buyer always has the option to walk away. Most sales contracts are written with appraisal contingencies that state the house must appraise at or above the selling price.
- Renegotiate. The buyer and seller can decide to renegotiate the sales price based on the appraisal.
- Re-appraise. While the seller could insist on having the property appraised again, the buyer's bank is unlikely to accept an appraisal from an outside source.
- Pay out-of-pocket. The buyer's bank will only lend based on the appraised value of the home. The buyers can, however, choose to pay the difference out-of-pocket.
The key takeaway here is that when a real estate appraisal does not come in where all parties expect it to, it does not have to be the end of the deal.
Understanding real estate property appraisals is important whether you're a buyer or seller. An unbiased estimate of your home's fair market value gives you peace of mind throughout the buying or selling process.