A home appraisal is an important part of real estate transaction if you are considering buying a home using a mortgage, selling your home to anyone using a mortgage or you are refinancing your home. An appraisal determines how much a home is worth for the seller, the buyer and the lender; it also protects the buyer and the lender from overpriced homes.
If you belong to any of the three groups, you sure want to have perfect understanding of what appraisal means, how the process works, and how appraisers determine the value of a home.
That is the focus of this article.
What is a Home Appraisal?
An appraisal is conducted to determine the value of a home – whether the price is proportionate to its condition, location, and features. It involves having a professional appraiser visit the home and inspect every component in order to arrive at an evaluation devoid of unfairness.
An appraisal is an essential step required by lenders in the process of using a mortgage to buy or refinance a home. Since the home serves as the collateral for the mortgage, an appraisal helps the lender to avoid lending homeowners beyond the worth of the home, and more than it might be able to recover.
If the borrower fails to repay the loan, the lender will sell the home to recoup the money using foreclosure.
The Appraisal Process and how Values are Determined: Although a buyer can initiate an appraisal to determine if the selling price fixed by the seller is within the market value of comparative properties in the area, and to ensure they are not paying more than they should for a home, it is usually ordered by lenders. The financial responsibility is, however, shouldered by the borrower.
A qualified – licensed or certified appraiser, who has no direct or indirect interest in the transaction, is hired to assess the value of the property.
During the inspection, the appraiser assesses the features of the home such as the number of bedrooms and bathrooms, the floor plan’s functionality, the square footage, crawlspace, attic, cabinets, water tank, roof, as well as the amenities within and around it. They also look at everything that is moving and mechanical to ensure the house is in good shape. The inspection must encompass the interior and exterior of the property, and any condition that adversely affects the value of the property such as requiring repairs or upgrades for safety reasons, is noted by the appraiser.
Apart from determining the condition of a home, an appraisal is also conducted to determine the estimated market value for a property which is influenced by various factors, including the condition of the home, recent sales of similar properties, and current market trends.
What a Home Appraisal Means for Homebuyers: The appraisal is one of the first steps in the closing process for home buyers who are under contract. The appraisal report determines if the transaction will progress as planned or fall through. For instance, if the appraisal comes at or above the contract price, it enables the transaction to progress but if it comes in below the contract price, it can delay or put an end to the transaction.
Appraisals help buyers guide against overpaying for homes. Also, a low appraisal often favours the buyer in that it presents an opportunity to negotiate and convince the seller to consider lowering the price. No bank can or will lend you more than the worth of the home. But in case the seller is not willing to drop the price despite the low appraisal, you can get a second opinion through another appraisal by a different person if it is financially viable for you.
What a Home Appraisal Means for Home Sellers: Home sellers must understand that a low appraisal, if found accurate, will compel them to lower the price of their home. And if they refuse to lower the price, it might be difficult to get the home sold. Waiting to sell the home to an all-cash buyer who does not require an appraisal, will most likely not yield any positive results as no buyer will ever want to overpay for a home.
Also, as a seller, if there have been recent distressed sales in your neighbourhood, it can affect the appraisal value of your home. You can, however, try to convince the appraiser that your home is worth more if it is in better condition than those properties that have experienced foreclosures and short sales.
What a Home Appraisal Means for Refinancing Homeowners: If you are using a conventional mortgage to refinance your home, it is essential you understand that a low appraisal can serve as an obstacle. The appraisal must come at or above the amount you are refinancing for you to get an approval.
After the inspection, the appraiser comes up with a report that details the process of determining the value of the home and what the estimated market value is, based on their observations.
Either the buyer, the seller or the lender can coordinate appraisals during mortgage approval process. In most countries, the appraisal report must include the following:
- 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
- Other pertinent information—such as market sales data, public land records, and public tax records—that the appraiser requires to determine the property’s fair market value.
How Long Does a Home Appraisal Take?
Most often than not, a home appraisal takes between seven to 10 days to complete. The first stage involves the appraiser inspecting the interior and exterior of the home, measuring the square footage, and evaluating the features and fixtures of the home for one or two hours. The next stage has to do with the appraiser conducting a comparative analysis on similar homes recently sold in the neighbourhood. After this, the appraiser will write a report. The total amount of time the process will eventually take depends on the complexity of the appraisal and the work schedule of the appraiser involved.
Does a Real Estate Agent Affect a Home Appraisal?
A home appraisal is carried out by home appraisers who are independent arbiters expected to be totally unbiased and objective in their valuation and reports. While a real estate agent can assist in the appraisal process by providing detailed knowledge of the property, and meet with the appraiser to go over recent home improvements, they are not expected to have any influence over the result.
What Happens after a Home Appraisal?
The next step after the completion of a home appraisal is mortgage underwriting which involves reviewing of the loan file by the underwriter. This is done to ensure that all the required documents have been submitted and that everything needed is in order.
This step is followed by the underwriter assessing the risks associated with the loan, and they are at liberty to deny or approve the loan based on the information gathered.
How can you Improve your Home Appraisal?
The major factor that influences the value of a home is the recent sales data in the neighbourhood but you do not have control over this as the buyer or the seller. If there is an increase in sales price, the subject home will also continue to increase in value. Apart from this, you can do the following to make sure that your home gets a high appraisal.
- Make Sure the Property is in Good Condition: The best and most possible way you can impact the appraised value of your home is by ensuring it is in the right shape. This will make the appraiser see the potential of the home. Make improvements to the condition and quality of the home. Consider using fresh paint and updating the kitchen and bathrooms as they can provide the best return on investment.
- Prepare a List of Recent Home Improvements: Another way to ensure your home receives a good appraisal is to give your appraiser a list of the improvements or upgrades you have carried out on the home and the special features you have added if there are any. This can help the appraiser support a higher value.
The outcome of a home appraisal determines a lot of things if you are buying a home using a mortgage. A high appraisal helps the transaction close easily and timely. But when the appraisal value comes in lower than expected, it can lead to delay or even cancellation of the transaction. Therefore, it is good to have a basic understanding of how the appraisal process works, especially how it can work in your favour, either you are buying a home, selling a home or refinancing one. This will be more helpful for you if you are a first-time home buyer.