For most people, completing the home buying process will involve getting an appraisal for the property they want to buy. This is a common way for the buyer and the lender to determine if the home is priced appropriately for its value. Like many aspects of home buying, the appraisal has a lot of individual factors that can affect the final result. Here's what buyers need to know about appraisals, so they can better prepare for this step.
What Is an Appraisal?
An appraisal is a detailed estimate of a home's value. It is typical for anyone who wants to buy a piece of property that is expensive or is likely to appreciate. As a general rule, buyers, or their lender, will request an appraisal as a way to verify that the offer price for the home is fair. Like a mortgage loan, this is a somewhat subjective process depending on factors such as:
- availability of other homes to compare
- appraiser's experience
- selection of comps
- strength of local real estate market
This means that two appraisers may come to different results, even for the same property at the same time.
Why Do Lenders Require an Appraisal?
Before lenders can provide hundreds of thousands of dollars in a mortgage loan, they want to be sure that it is a good investment. Buyers who pay more for the home than it is worth may have a harder time selling it, or could be more likely to default on the loan. Lenders typically will not grant a loan for more than the house is worth, except in specific circumstances like a fixer-upper. The appraisal also helps to hedge against rapidly-increasing home values in regions with a competitive real estate market.
How Does an Appraiser Work?
The appraisal process requires a professional appraiser to examine the property and compare it to others in the area. Typically, the appraiser has experience estimating the value of homes and lots in nearby areas. They use existing home sales and real estate trends for the neighborhood to establish a fair value for the property in question. To do this, they usually select a number of recent sales of similar homes as comparable properties, or comps. They make adjustments based on:
- square footage
- lot size
- number of bedrooms and bathrooms
- relative age
- recent improvements
- amenities, like a deck or patio
Once they have this information, the appraiser inspects the property to verify their estimates. The result is a detailed report explaining their conclusions and methods.
Who Pays for the Appraisal?
Depending on the state and lender policies, either the home buyer or lender will pay for the appraisal. In some cases, the buyer pays but the lender serves as the appraiser's client. This gives the lender the right to obtain the report and review it without first having to ask the buyer for permission. Regardless of who pays for the report, the home buyer is usually given a copy of the report for their review. They are not obligated to disclose the information to the seller, but they may choose to do so if they need to cancel or renegotiate the purchase contract based on the report.
How Does Appraisal Value Affect the Buying Process?
Since financing is often such a big part of a home purchase, the purchase contract may fail at this step. Buyers should be wary of making an offer above list price or far above the average home prices in the area, especially if they are dependent on a mortgage to buy the home. A buyer who offers $30,000 over asking may have to make up the difference in cash, if the appraisal does not reach that value. If the appraisal comes in much lower than the offer, the seller may need to accept a new contract at a lower price for the sale to continue.
Home appraisals are often a required step Dolores CO home buyers or mortgage lenders may need to complete before they can secure a mortgage. By anticipating the way appraisals affect the buying process, buyers can aim to make an offer that is likely to succeed.