Understanding Appraisals

Understanding Appraisals

Insights for Savvy Homebuyers

Buying a home is one of the most significant investments you'll ever make. For those buyers using financing to make a purchase,  part of this process involves obtaining a real estate appraisal. While many homebuyers know that appraisals are a crucial step, understanding the intricacies of what they entail, why they're necessary, and how they can impact your purchase can be daunting. Let’s dive into the world of appraisals to shed some light on this essential aspect of home buying.

What is an Appraisal?

An appraisal is a professional, unbiased opinion of a home's value provided by a certified appraiser. Unlike a home inspection, which checks for structural issues and problems within the property, an appraisal determines the market value. This value is crucial for lenders, who use the home as collateral for the mortgage loan.

Why Do We Need an Appraisal?

The primary reason for an appraisal is to protect the lender. The lender wants to ensure that the property is worth the loan amount and will be able to recoup the value if they need to resell. Essentially, the lender will not lend more money than the appraised value of the home.

Who Pays for the Appraisal?

The cost of the appraisal is usually covered by the buyer and paid upfront. Once the appraiser is hired, they will coordinate with the listing agent to schedule a visit, which usually takes about 1-2 hours. After the visit, the appraiser compiles a report, which takes a few days to complete. Both the lender and the buyer receive copies of this appraisal report.

How Do Appraisers Determine a Home’s Value?

1. Appraisers primarily use the Sales Comparison Approach. This method involves evaluating a home against 4-5 comparable properties (comps) that have sold within a one-mile radius in the past six months. Adjustments are made for differences in features, ensuring a level comparison.

2. Another method, the Replacement Cost Estimate, might be used in cases where there are few comparable sales. This approach calculates what it would cost to rebuild the property from scratch, and it’s more commonly applied to commercial properties.

What Does the Appraiser Look At?

An appraiser typically examines the following aspects of the home:

• Exterior: Roof condition, foundation stability, and the state of siding or brickwork.
• Health and Safety: Any hazards, such as tripping dangers.
• Size and Layout: Verification of square footage and overall layout
• Interior Condition: The state of flooring, walls, plumbing, electrical systems, bathrooms, and kitchens.
• Improvements: Any updates or renovations made to the home.
• Amenities: Additional features like pools, which can add value

The Appraisal Gap: What If the Appraisal is Lower Than the Purchase Price?

In a competitive market where buyers are often paying over the listing price, there is a possibility for an appraisal to come in lower than the agreed purchase price. This situation, known as an appraisal gap, can be challenging. Here are a few options if you face an appraisal gap:

1. Pay the Difference: Cover the gap between the appraised value and the purchase price out of pocket.
2. Walk Away: If you have an appraisal contingency in your contract that stipulates you have the option to terminate without penalty, you could decide to terminate.
3. Renegotiate: Try to negotiate a lower price with the seller.
4. Request a Review: If you believe there were errors in the appraisal, you can ask for a review.
5. Apply with Another Lender: Sometimes, a different lender and a new appraiser may find higher value in the property.

The options above are simplified answers to nuanced and sometimes complicated transaction terms. As a buyer, it is important to align yourself with a buyer’s agent who clearly understands these elements and can make sure you as a buyer are fully educated on your options. Having a clear understanding helps to empower you to make the best decision within the terms of your transaction. Our goal at the Bill McGarrigle Team is to help you understand what real estate appraisals are, why they matter, and how they can impact your purchase, so you can navigate the home-buying process more confidently. Remember, an appraisal not only helps secure your mortgage but also ensures you're making a sound investment in your new home. Happy house hunting!