What is a Home Appraisal?

home appraisalA home appraisal is a full evaluation and subsequent written report regarding the value of a home. Many lenders may require such an appraisal before approving buyers for a mortgage. Regardless of whether or not you have been approved for a mortgage of a certain amount, the lender will want to ensure the home is actually worth the price agreed upon by the buyer and seller before issuing the loan. This is done through a home appraisal, conducted by an unbiased third party who does not have a financial interest in the sale of the home, other than their appraisal fee.

The appraiser will take into consideration the size, condition, features, and location of the home. The two methods for determining value include:

  • Comparing the property to other similar homes in the area. The appraiser will look at recent sale prices for homes in the same neighborhood with similar features and square footage. They will then determine how the home fits into this current market in terms of its value.
  • Estimating the cost of replacing the property. This approach assesses value based on how much it would cost to rebuild the structure of the home if it were to be destroyed. They will then also evaluate the lot the house sits on and the surrounding area. This is more common for new construction homes.

Once they have examined the physical structure of the home and sufficiently documented their observations, the appraiser will conduct whatever market research is required to come up with a value for the home. They will then generate a written report including the following information:

  • A statement of how the value of the property was assessed (what methods were used).
  • Measurements and notes about the size, condition, fixtures, and features of the home, including any upgrades and materials used for improvements.
  • Adequate documentation of the physical property in the form of photographs, sketches, and maps.
  • Notes about any significant structural problems, like a cracked foundation or water damage, which may lower the value of the home.
  • An evaluation of the neighborhood and surrounding area, including the lot the home sits on.
  • An assessment of comparable home values and market trends affecting the value of the particular property.

But what if the appraisal value is lower than expected? This could be due to many possible reasons. As a buyer, this is not always a red flag that you are paying too much for the property. Furthermore, it does not mean the deal is dead if you still want the home. Rather, look into why the appraisal came in on the low side. If it is due to something fixable, such as needed repairs, you may be able to work out a deal with the seller to make the necessary improvements. In addition, having a second appraiser come in is perfectly acceptable as well. This could be especially significant if you believe the first appraiser was inexperienced or simply not very familiar with the area. In fact, this is a common problem in our current market. With homes selling so quickly, many appraisers are coming from outside of the area to pick up the slack with the workload.

Another reason for a valuation below the agreed-upon sales price could be the very recent trend of price appreciation in the current market. Most homes are selling for list price or above, but with things moving so quickly and prices continuing to go up and up, an adequate sales history is simply not available yet.

It is also important to note, while a home appraisal may look into the condition of the home, this is not a home inspection. Buyers should get a separate inspection to determine whether or not there are any significant issues that need to be repaired or considered before the sale is final. But remember, if any issues do arise, there is always the opportunity to further negotiate with the seller to reach a mutually beneficial solution.


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