First, an appraisal is simply an opinion of a home’s value. While a buyer may be in love with a home and make a “no way to turn it down” offer to purchase it, if you require a loan, the lender will want to make sure that the home is worth what you have offered to pay for it. If it isn’t, then they likely will not lend you the money to purchase it or will only finance an amount less than your offer on the home. They have to make sure that should you be unable to pay for it, they have the equity to sell it and get their money back. In the real estate industry, the value of a home can only be determined by a state-certified or licensed appraiser.
How Does an Appraiser Find Information on a Home?
An appraiser will typically visit the property as part of the appraisal process to inspect it. If it is a new construction/construction loan, the appraiser will visit the lot where the house is to be built. They will require plans, a copy of the construction contract, and the specifications/finishes to be placed in the home.
For existing homes, the appraiser will use the county and city records along with information for the Multiple Listing Service (MLS). The appraiser will also conduct a home visit to arrive at a number of how much a home is worth. While there, the appraiser is looking for things like obvious repairs, if any updates have been made, if there is any water damage, etc.
What Method Does an Appraiser Use to Determine the Value of a Home?
An appraisal aims to determine a property’s value that reflects its condition, age, location, and other relevant characteristics. Appraisers rely on the following three methods of establishing real estate property values:
Cost approach – This practice operates under the premise that a property’s value should equal the cost of building an equivalent building, taking into account the cost of the land and construction expenses, less depreciation. After all, it would be economically illogical for a home buyer to pay more for a property than it would cost to build a similar structure from scratch.
Sales Comparison Approach – This is the most common method, where appraisers value a property based on the recent selling prices of similar properties in the same neighborhood. To accomplish this, at least three comparable properties must be reported within the last year, in an open and competitive market.
Income Approach – Sometimes referred to as the “income capitalization approach,” this estimates the value of a property based on the income it generates. It’s calculated by taking the net operating income (revenue the property generates minus operating expenses), and dividing it by the capitalization rate—the expected rate of return.
Are Appraisers Ever Wrong?
By law, the homebuyer is entitled to a copy of the appraisal report. If you get a low appraisal, you can request a copy of the report through your real estate agent. Typically, sellers don’t have access to this. However, the buyer or anyone paying for the appraisal can request a copy of it. The Bureau of Consumer Financial Protection (CFPB) states that the mortgage lender must deliver a copy of the report upon request.
Once you have acquired the appraisal report, comb through it meticulously and check for errors. Keep in mind there is always the possibility that your appraiser made an honest mistake when writing your report. You should sit down with your real estate agent and review the homes your appraiser deemed similar. Did the appraiser correctly report the number of bedrooms and bathrooms? Is the square foot correct? Did they get the right lot size? Seemingly small oversights can lead to big problems down the road.
What if My Appraisal Comes in Lower Than My Contract?
When the appraised value comes in below the contract price, it limits the amount a lender will finance because they base the loan on the appraisal. A low appraisal might delay or even derail your closing. If you have done everything above to correct any errors, you have a couple of options:
- The Seller and the Buyer can negotiate a new and lower sales price
- The Buyer can increase their down payment to meet new Loan-To-Value requirements and down payment minimums
- The Seller and the Buyer can cancel the contract
Do I Want to Get an Appraisal, Even Though I am Paying Cash?
If you pay cash for your home, there is no legal need to get an appraisal. However, as a buyer, you may choose to have a home appraisal even if you’re not opting to do any type of traditional financing. This is primarily for peace of mind. Are you paying more than the home is worth… or, did you get a great deal!
If you are an out-of-town buyer, you are probably out of touch with the property values in the location of your new home. For example, property values in Connecticut are very different from those in Georgia. You may want to make sure you are paying a fair value for the property in your new location and an appraisal may be the right vehicle to use to submit an offer that correlates with your new location.
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The post How Do You Appraise a Home and Why Do You Want One? appeared first on Impresa Modular.