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How Home Appraisals Work

The chances are that if you haven’t been active in the real estate market in recent years, the topic of home appraisals might be pretty new to you. However, this is a very crucial subject, especially when you’re planning to buy a home using a mortgage, selling your house to someone else other than an all-cash buyer, or even refinancing your existing mortgage. Regardless of whether you’re a buyer, seller, or homeowner, you want to fully understand what a real estate appraisal is and how it works. What do appraisers look for when determining a property’s value? Here is everything you need to know about home appraisals.

What Is a Home Appraisal?

A home appraisal is basically a certified or licensed appraiser’s unbiased opinion of a home’s value. The lender usually hires this appraiser to help determine the fair market value of the property. In the majority of the states the borrower pays for the appraisal but not always. For example in Alaska, the seller pays for it. As mentioned earlier, home appraisal reports are commonly used in refinance and purchase-and-sale transactions.

When it comes to refinancing transactions, the real estate appraisal assures lenders that they won’t be handing out more money to the homebuyer than the home is worth. Since lenders use the home as collateral for the mortgage, they can always sell the property fairly and recoup their money.

On the other hand, in a purchase-and-sale transaction, a home appraisal helps verify that the home’s contract price is fair, based on the home’s condition, location, and features.

How Do Home Appraisals Work?

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The main purpose of the home appraisal is to protect the lender’s interests, and the lender usually orders it. This usually happens immediately after the seller and the buyer have agreed on the offer. The lenders will hire a home appraiser of their choice who will then contact the seller to set up a suitable date and time for a home visit.

A real estate appraisal or home-appraisal process usually costs in the region of $700-$1,000, based on how complex the property is. It’s also very important to note that the borrower covers all home appraisal fees. The home appraiser visits the property and then makes assessments, measurements and even takes pictures of the interior and exterior.

As per the Appraisal Institute, a qualified home appraiser should have a real estate appraisal license. The appraiser should also be familiar with the local areas and shouldn’t have any direct interest in the ongoing transaction.[1]

Residential appraisal reports which generally abide by the Fannie Mae appraisal guidelines rely on the following factors:

An Appraisal Inspection

A home appraiser might decide to review both the internal and external features of the home to ensure that it’s in the best structural condition possible. This inspection is also meant to ensure that there are no major safety issues and verify whether the home has gotten any major upgrades since the last real estate transaction. The home appraiser does this by taking pictures of both the exterior and interior during the walk-through.

Appraisal inspection for government-backed loans such as VA and FHA loans usually differ from conventional loans. During appraisal inspections for these government-backed loans, the appraiser needs to test all the appliances and utilities in the house to ensure they’re in good working condition.[2]

The Research You Need to Do

Another factor determining the home appraiser’s value is the prices of comparable homes recently sold in the real estate market. These homes should have the same characteristics as the home of interest and be from the same location.

Real estate appraisers will normally review government records and the home sale information posted by real estate professionals on Multiple Listing Service (MLS) to get such information.

A Valuation Approach

Also, the appraiser can decide to take a cost-based or sales-comparison approach. This is an estimate of how much it would cost to build the home today and the value of the land.

What Do Appraisers Look for When Determining a Property’s Value?

Here are some details that appraisers take into account during market research and an appraisal inspection:

  • Lot and home size
  • Age and design of the home
  • Previous updates, improvements, and repairs
  • Amenities such as decking, fireplace, pool, among others
  • The age and condition of the appliances
  • Construction materials used in building the property
  • Local housing market trends
  • Neighborhood characteristics

Home Appraisal vs. Home Inspection

Even though both a home appraisal and inspection are important to the home-buying process, they usually serve different purposes. A home inspection is mainly focused on the home buyer’s interests since its main purpose is to evaluate the home’s condition and determine whether any repairs will be necessary before the transaction moves forward. On the other hand, a home appraisal is necessary when determining the home’s value for the benefit of the lender and not the borrower.

How to Prepare for a Home Appraisal

The best way to prepare for a home appraisal is by understanding how the process works and everything involved. It’s in your best interests to research the home and its neighborhood to determine how much it might be worth.

If you’re looking to refinance or sell the home, the best way to prepare for this exercise is by cleaning the property and ensuring that everything is in good condition before the real estate appraiser arrives.[3]

How Home Appraisal Helps the Buyer

  • It confirms the home’s value so that both the buyer and seller can proceed.
  • A low appraisal usually gives the buyer more bargaining power.
  • A home appraisal also gives buyers more home equity if they plan to get a home equity loan or line of credit and ditch a mortgage loan.

How Can a Seller Challenge a Home Appraisal Report?

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If you believe that your home got an unfair low appraisal and you would like to challenge it, there are some issues you can look out for:

  • Previous comparable sales or ones that are not near your location
  • An incorrect number of rooms
  • The square footage listed on the appraisal report doesn’t resemble the actual size
  • Major updates and improvements unaccounted for

The Difference Between Appraisal vs. Market Value

The market value of a home is the agreed price between the buyer and the seller. The appraisal value of a home is the value determined by a licensed real estate appraiser. If the real estate market is struggling and only a few buyers are showing interest in your home, the chances are that the market value of your home will be lower than the appraisal value.

On the other hand, if more buyers show interest in your property, the appraisal value will likely be higher than the market value.

Summing Everything Up

A home appraisal is a fundamental concept that every home buyer or seller should be familiar with. This is because going through the home appraisal process guarantees that you’re getting the best out of your home or home loan if you’re the buyer.

Was this article helpful? Are you looking for an appraiser for your home? Contact Peggy Young at RE/MAX Fine Properties, and let us help with your real estate appraisal.

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