Understanding the Importance of Home Appraisals

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If you are thinking about buying a home soon I bet you’ve been told you need an appraisal. You might also be wondering what a home appraisal is and why you need one.

By definition, an appraisal is an estimate of the property’s fair market value. It’s performed by a state-licensed professional who is trained to provide unbiased opinions of the property based on value, location, physical appearance, and amenities.

The purpose of an appraisal is to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In other words, when a buyer makes an offer on a home and the seller accepts that offer, it is the job of the appraiser to determine whether or not the property is being sold at a fair price in relation to other properties in the area.

This is actually a mechanism mortgage lenders use to protect themselves from loaning too much money for a property that isn’t worth the contracted sale amount. It also protects the buyer from paying too much.

Understanding Appraisal Methods

There are 3 common appraisal methods. Cost, a sales comparison, and the income approach. Let’s take a quick look at each method.

The cost approach is used to obtain the property value by determining what it would cost the buyer to build an equivalent building.

The sales comparison is the approach you might be the most familiar with. An appraiser will use 3-4 comparable properties, also called comps, that have recently sold within the same neighborhood and within the last 6 months when possible.

The income approach allows investors to estimate the value of a property by taking the net operating income of the rent collected and dividing it by the capitalization rate. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that affect the property’s value, such as needed repairs.

If you don’t understand this last approach, don’t worry about it, unless you are a property investor.

The Appraisal Process: What Happens After Inspection?

The appraiser will provide an analysis and conclusions about the property’s value based on his or her observations. The report must include a street map showing the appraised property and comparable sales used; an exterior building sketch; an explanation of how the square footage was calculated; photographs of the home’s front, back, and street scene; front exterior photographs of each comparable property used.

One thing clients and the lender need to know is whether or not the appraisal values the home at or above the contract sales agreement. When the appraisal value is lower than expected, the transaction can be delayed or even canceled.

Dealing with a Low Appraisal: What Are Your Options?

In the case of a low appraisal, meaning the contracted sales price is more than the actual value of the property, a couple of things can happen. As a buyer, you can use this as an advantage to negotiate a lower sales price. Remember, the bank won’t lend the buyer more than the home is worth.
If a bad appraisal is standing between you and your home purchase or sale, investigate getting a second opinion via another appraisal.

Appraisal vs Home Inspection: What’s the Difference?

Often clients get confused between a home inspection and appraisal. In most cases, we’ve had clients say, “Well, we already got a home inspection why is an appraisal needed now?”

Here’s the difference. A home inspector is looking for any defects with the home that may cause you financial grief later. The appraiser is looking for the value of the home.

The Timeline of a Home Appraisal: What to Expect

You might be wondering how long an appraisal will take. Once we (the mortgage lender) get the okay from you to order the appraisal, we place the order through an appraisal management company (AMC) website. From there it gets assigned to an appraiser usually the same day.

Once the appraiser has accepted the order, they will call the point of contact to get it scheduled. This is usually the seller. Depending on the availability of the appraiser and the seller it could be scheduled within the next day or within the same week. Once the appraisal is completed, the appraiser usually has about a week to turn in the completed report to the appraisal management company.

In busy markets, turn times can sometimes take 3-4 weeks but they can be done as quickly as 2-3 days. As the buyer, you do not have to be present for the appraisal, but you are entitled to receive a copy of the appraisal report.

As the buyer, you do not have to be present for the appraisal, but you are entitled to receive a copy of the appraisal report.