Real Estate Appraisals Explained

Real Estate Appraisals Explained

– The home appraisal is a key component to the purchase of any third-party financed home purchase. Just because you have gotten a pre-approval from the bank doesn’t mean that it’s as easy as closing on the deal and moving in. The next hurdle you face is the appraisal of the real property. A licensed appraiser will determine the value of the property that ultimately affects whether or not the lender is willing to produce a loan on the property. The appraisal affects both the buyer and seller as the real estate appraiser determines the perceived price of the property and can work against both parties if the appraisal varies from the purchase price.

Keep in mind that an appraisal isn’t just done in the context of the purchase of a property. Other reasons that an appraisal may be conducted include refinancing a property, insurance issues, donation to charity, estate planning, collateral for a loan, tax loss or equitable distribution to name a few.

Real Estate Appraisals Explained

The Appraisal Process

A lender typically has a list of approved state licensed appraisers with whom they work.  That way they ensure both that the appraiser is certified and licensed, but also that they get consistent appraisals.

The appraiser protects all parties involved in the transaction as the bank doesn’t want its collateral to be less than the amount of the loan. An appraisal report is normally the borrower’s responsibility to pay for with an average cost around $300.  But, this is dependent upon the price and type of property.

Two primary appraisal methods exist for residential property. The first, and most commonly used, is the sales comparison approach. This method involves the appraiser comparing the property with three or four similar properties that have sold in the area. The comparables are utilized to factor in square footage in relation to the property being appraised, lot size, age of the house and other features.

The second type of appraisal method is the cost approach. This is most commonly utilized in the case of a new construction and is the estimated cost to replace the structure. Depreciation and the value of the land are factored in to determine the property’s overall worth.

The Appraisal Report

The appraisal report consists of a variety of information gathered. Often an appraiser will perform a physical inspection of the property (both inside and out). Additionally, the appraiser will utilize information from past sales from courthouse/ county assessor records as well as the local multiple listing service.

Below are a few key elements of an appraisal report:
• Details about the property being appraised. Condition, size, and other attributes
• Supporting documentation such as photographs, map and sketches
• A comparative market analysis completed in order to support the appraised value
• A valuation summary
• Comparables and sources
• Certification of the appraiser

The appraisal doesn’t only factor the value of the home itself, but also any permanent structures as well as the land on which the home is built on.

Ultimately, it’s the appraisal amount that determines the amount of loan that the borrower can attain on a given property. If a property appraises under the offer price (and loan value), then the lender will not loan any more than the actual appraised value. If you are in the scenario of an appraisal coming in lower than the asking price, then it may be a red light that you are paying too much for the property. A second opinion from a different appraiser may be sought.  Or, further research may be done as to why the appraisal came in under the estimated value of the property. If the deal is going to fall apart on account of the appraisal coming in under the asking price, then the seller may negotiate a deal with the buyer for a lower price. Alternatively, the seller may be willing to carry a second mortgage to make up the difference between appraised value (which determines the loan amount) versus the higher purchase price or the buyer can increase the amount of the down payment. If none of these scenarios can realistically play out, then the offer is usually withdrawn and the buyer can recoup any deposit made (such as earnest money) as a loan contingency usually resides as a part of a real estate purchase contract.

While the home appraisal does mean money out of the buyer’s pocket, it is a great investment to make as a protection in the home-buying process.

Probatewe buy houses, Real Estate Appraisals Explained

Rick Toney

View posts by Rick Toney
Rick Toney Is A Seasoned Real Estate Professional With Over 25 Years Of Real Estate Experience, Writes A Weekly Real Estate Blog And Is A Principal of Blue Moon Realty Group And Mesa Realty Advisors. Blue Moon Realty Group Is A Residential Redevelopment Company Specializing In The Purchase And Renovation Of Older And Physically Distressed Homes (Flip This House Boston). Mesa Realty Advisors Is An Affordable Housing Developer Specializing In The Redevelopment Of Existing Low-Income Housing Properties. Rick Is A Certified Public Accountant (CPA - Retired) In The State Of California, A Certified Property Manager (CPM - Retired) And A Real Estate Broker In The States Of California (Retired) And Massachusetts.

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