The Importance of a Good Appraisal
Whether you’re selling or buying, you might not be thinking much about the home appraisal process. It isn’t one of the most glamorous parts of buying or selling a home but if home appraisals disappeared tomorrow, the real estate market would come crashing down, so if you’re about to buy or sell a home and know little about appraisals, it’s time to change that.
A home appraisal is, at its most basic level, a very educated guess as to how much a property is worth by a qualified, certified appraiser, and they’re extremely important because no credible financial institution will lend anyone money for a house without an appraisal. An appraisal lets a bank or lender know what the loan collateral will sell for in a worst-case scenario. In other words, to go with an extreme example, a lender doesn’t want to be stuck with a property for which they lent the borrower $300,000 but can only sell for $100,000 because that’s all it’s worth. The homebuyer shouldn’t want that either, obviously. A home appraisal is the best way for a lender to make sure they won’t lose their seat on the deal, and it’s also a way for the buyer to see if the home they want is overpriced or not.
So appraisals exist for good reason, but what can make them a tense time for all parties is that they’re conducted after you’ve negotiated a price, agreed to buy or sell the house and signed the contract. So it’s in everyone’s best interest that the appraisal comes in at the agreed upon price. To clarify, if it turns out that you as the buyer about to purchase a house for a wildly inflated price, that doesn’t necessarily mean you’re obligated to buy the house but if you aren’t careful, it could mean just that. The sales-and-purchase agreement should address the possibility that your appraisal comes in below the purchase price, and allow you to terminate the contract or renegotiate the price, so both parties need to keep in mind the reality of the appraisal that will come in after the deal has been negotiated.
What does an appraiser look for? Generally, an appraisal starts with an inspection of the inside and outside of the home, as well as sale and ask prices for comparable homes in the area. The appraiser will create a report for the lender that should includes the following details, which help them ascertain the property’s value and prove it objectively to the lender:
- An explanation of how the appraiser determined the value of the property
- The size and condition of the house and other permanent fixtures, along with a description of any improvements that have been made and the materials used
- Statements regarding serious structural problems, such as wet basements and cracked foundations
- Notes about the surrounding area, such as new or established development, rural acreage, etc
- Evaluation of recent market trends of the area that may affect the value
- Comparative market analysis that supports the appraisal: maps, photographs and sketches
An important distinction to make is that an appraiser is not a home inspector. An appraiser will make note of obvious issues, but doesn’t actually inspect the home to see if it is up to code. For that, you’ll need to hire someone to do a home inspection to avoid any costly repairs in the future if something is wrong with the house. Both an appraiser and inspector will walk around the house and take a good look at it but they’re each at the house for different reasons. The appraiser is looking at the value of the home, while the inspector is looking for any defects with the home that may cause you financial grief later. If the appraiser notices a problem, however, they won’t ignore it. If the appraiser spots a leaky sink or some loose wiring, they may advise or even request an inspection
As with most aspects of real estate sales, the buyer pays the appraisal. The price of an appraisal is based on factors the location of the property, square footage of the home, or property type, but for the most part it’s the least expensive aspect of selling a home. The appraisers fees are usually included in the closing costs of the home unless a deal on the property is not made.
We mentioned earlier that there always exists the possibility that the home you may be selling will be appraised at a lower price than the one you’re asking. If that happens, you’ll first need to determine why the appraisal was low. It could be something that you could correct, or the home could be overpriced. If it turns out that the home is just overpriced, it may be time to consider lowering the asking price. Remember, the buyer’s ability to get financing and complete the sale depends on this, and if they walk away you as the seller will still have to repeat this process anyway. You can also request another appraisal on the home, but keep in mind that you will probably be paying for the second appraisal if you didn’t like the value it came in at.
The best way to avoid such hassles is to make sure there’s nothing left to chance, as in, there are no small flaws, maintenance issues, poor landscaping, or general disrepair that could drive down the appraised value of the home. After all, appraisers are only human. You could have a great property easily worth between, say, $200,000 and $225,000, but if it’s in bad repair or lacking in curb appeal, it’s easy to imagine the appraiser coming down closer to a price of $200,000. So for motivated sellers, a few common-sense steps are in order: the day the appraiser comes, the lawn should be mowed, the landscaping weeded and the bushes trimmed. Clean the house. Get out the air freshener. Turn on the lights and open the blinds. You’re not actually selling the home to the appraiser, but you might as well think of it that way because without a good appraisal, your home probably won’t sell.
It’s also a good idea to sit down the day or night before the appraiser arrives and make a list of repairs and improvements that have been done to the house over the past several years. If you’ve put on a new roof or bought a new hot water heater, let the appraiser know, and note anything you can think of – the appraiser will decide what is important to the value. It doesn’t have to be formal or detailed, but all the same thoroughly note everything so you can give it to the appraiser before he or she leaves. Remember, don’t get too excited if you’ve spent a lot on repairs and renovations. Your $30,000 kitchen remodel may help the appraisal, but it won’t automatically mean your house is worth an extra $30,000.
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– Get It Right Solutions