Real Estate Appraisals: What You Need to Know

Written by Posted On Wednesday, 29 April 2020 12:50
How Do Home Appraisals Work? How Do Home Appraisals Work?

Real Estate Appraisal Explained

How market value is determined is one of the most misunderstood topics in real estate transactions. Home appraisals are a vital part of most types of house sales. Unless the transaction involves a cash buyer, there is likely to be an appraisal needed. If you are refinancing your mortgage, a real estate appraisal will almost always be a requirement.

A home appraisal is used to find the unbiased value of the property. It is used by the lender involved in the transaction, to make sure that they aren't lending more than the home is worth. If the appraisal doesn't go the way you expect, it can have significant consequences on the transaction.

Here are some of the finer points about home appraisals you should know.

How Appraisals Find the Value of the Home

Usually, an appraisal is conducted on the instructions of a lender. This is because it protects the lender's investment, making sure they aren't loaning more money than the home is worth. The appraisal is carried out by a licensed and qualified professional who is familiar with the local market conditions.

The appraiser has to be impartial and isn't allowed to have any interest, either direct or indirect, in the property. The value will be assessed using the information on recent home sales in the local area for properties of a similar type. Other factors that the appraiser will consider include; the number of bedrooms, the number of baths, overall size, floor plan, and amenities the home offers.

The condition of the home will also play a part in the findings of the appraiser. They carry out a visual inspection of the house to assess the state, though they aren't as thorough as a home inspector would be.

A report is created, giving the conclusions on the value of the home. Also required in the report is a map of the area showing the locations of the comparable properties, descriptions of the interior and exterior, along with a sketch of the layout. Photographs will be used to show the front and rear of the property as well as the street the home is located.

Other important information is included if it affects the valuation. This could mean sales data and tax records if the appraiser used this in evaluating the fair market value.

There will also be historical data such as the way the market is moving (either up or down), inventory levels, time on the market, and other such pieces of empirical data points.

What Homebuyers Should Know

If you are buying a home, the appraisal could be a make or break step in the closing stages of the transaction. If they find the value of the home is at least what you have offered, the sale can proceed, and the mortgage approved. If they conclude that the house isn't worth what you were going to pay, the lender isn't going to lend more than the home's value.

If this happens, you may be able to negotiate a lower purchase price with the seller. Some sellers, however, are reluctant to accept a lower price just because of one person's opinion of value. When a seller isn't willing to budge, a buyer would need to come up with additional down payment monies in order to satisfy the lender. Quite often, this may happen when a buyer realizes the appraiser may be wrong.

In situations where a buyer wants to proceed regardless of the appraisal, having saved for a larger down payment can be a godsend.

In other circumstances, the appraisal can stop you from making an expensive mistake, or lead to the deal falling through if the seller won't reduce their price. A second opinion can be sought from a different appraiser if their conclusion seems wrong.

In cases where the seller knows the buyer has overpaid, it's possible they might be more inclined to adjust their price. After all, if the next buyer that comes down the road will probably need an appraisal as well.

What Sellers Should Know

If you are selling your home, and you feel that the appraisal has been lower than it should be, you may have to reduce your price. It might be the case that there have been some similar homes sold under their normal value locally. Perhaps there have been foreclosures or distressed sales. But whatever the reason for this, you will have a difficult task in trying to convince an appraiser that your home is worth more.

If your home is in a better condition than the comparable properties, the appraiser might be swayed to your way of thinking. But if not, you could hold out for a cash buyer, reduce your price, or even take it off the market until the local conditions improve.

What You Should Know if You're Refinancing

When you are refinancing your mortgage, a low real estate appraisal can cause problems. It could mean that your new loan won't be approved by the lender. For the refinancing to be accepted, your home has to be worth more than the amount of the new mortgage.

The only time you can avoid this situation is if you have an FHA loan. This can be refinanced without the need for an appraisal through the FHA Streamline program.

The home appraisal stage can seem like a formality, but if things don't go your way, it has the potential to end the transaction. If you understand the process and the possible issues, you will be better equipped to deal with any problems should they arise.

Other than an inspection, there is not a more significant hurdle in a real estate transaction than the home appraisal.

Final Thoughts on Home Appraisals

Whether you are buying or selling a home, it is essential to have a handle of the home appraisal process. If you are selling a home, it will be vital to get your home prepared for the appraisers' arrival. Make sure you that you've taken care of any blatantly obvious defects that the appraiser will flag.

If you are buying, make sure you understand ahead of time what your course of action will be if the home does not appraise. The better-prepared buyers and sellers are, the easier it will be to resolve any disputes.

About the author: The above article on what to know about home appraisals was written by Bill Gassett. Bill is a nationally recognized Real Estate leader who has been helping people buy and sell property in the Metrowest Massachusetts area for the past thirty-three plus years. Bill has been one of the top RE/MAX Realtors in New England for the past decade-plus.

His real estate advice has been featured on CNBC, RIS Media, National Association of Realtors,, Inman News, Placester, Credit Sesame, and others.

Bill covers real estate sales in the following Massachusetts communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

Reach out for Bill's advice anytime you need it.

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