The next step in the home buying process after securing a mortgage is to get an appraisal of the home you’re looking to buy.
What is A Real Estate Appraisal?
In this article, comparative market analysis, or CMAs, were discussed. These are similar to real estate appraisals, but do not replace them. An appraisal is more detailed and is performed by a state-licensed real estate appraiser rather than a real-estate agent. While a CMA can determine a possible price range to sell a house, an appraisal is a more exact determination of the actual value of the house.
A borrower is expected to pay for the appraisal upon finishing the loan application with the mortgage lender. Appraisals generally will run $300-400 each.
The appraisal serves as a protection for the lender in that knowing the value of the house will provide the lender the exact amount of collateral should the borrower default, and it ensures the lender doesn’t lend too much money (as mentioned previously, most lenders won’t loan more than 90 percent of the house’s value). An appraisal also protects the buyer from paying too much for a house.
What Goes Into A Real Estate Appraisal?
A real estate appraisal can be performed in two ways. One is called a sales comparison approach, in which the appraiser compares the property with three or four similar properties that have sold in the area recently. The assessment compares specifics in each of the houses, like lot size, square footage, style and age and other amenities (garages or basements, for example). The appraiser will not only physically inspect the property, but will also refer to real-estate listings and county public records of house sales to gather comparative information.
The other appraisal method is simply a cost approach, which usually applies to new construction. This is an assessment of the cost to replace such a structure should it be destroyed, plus a determination of the value of the land the structure sits upon to determine value.
The appraisal report that results will include:
An explanation of how the value of the property was established.
Size and condition of the property and fixtures, and any improvements made and the materials used in the improvements
Notations about any significant structural problems
Notes about the surroundings – new or existing development, urban or rural acreage, etc.
A market evaluation to note trends that may affect the value
A comparative market analysis (CMA) consistent with the appraised value
Maps, photographs or sketches about the property and its location
What If The Home’s Appraised Value Differs from the Price?
This is something that could very likely happen. The seller may be underwater on his house and wants to recoup some of the money by offering a price that is well above the appraisal. Or maybe the seller just wants out quickly because of a sudden transfer to another city and sells for much lower than the appraised value. Other factors like the surrounding housing market may affect values – a “hot” market may force an appraisal to be too high, while it may be too low in a “down” market, or vice versa.
But the appraisal is important because it is the basis of determining how much money the lender will be willing to loan a homebuyer. So what to do?
- Get a second opinion from another home appraiser approved by the mortgage lender. Mistakes could be made and found with a new set of eyes.
- If the appraisal is higher than the agreed price, come up with more of a down payment, or ask the seller to pay a portion of the down payment or cover all closing costs.
- If the appraisal is less than you agreed to pay, you could offer to upgrade or do repairs in exchange for a lower selling price.
The lender requires an appraisal on a property, but it is the potential buyer’s responsibility to pay for it. However, because of the protections an appraisal provides all parties in a sale, it is important and is likely money well-spent to make sure the sale is fair to all parties.
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