What is a Real Estate Appraisal?
What you need to know about your appraisal
What is a real estate appraisal and do you have to have one when purchasing a home? Unless you are paying cash for a home a real estate residential appraisal is required by your lender as a requirement of the mortgage. An appraisal is an estimate of the home’s value performed by a licensed appraiser of your state. The appraiser is working on behalf of the bank, and it is the appraiser’s job to verify that the lender is not making a loan for more than the home is worth. Appraisals are ordered by your lender and you are required to pay for the appraisal prior to it being performed. If the home does not appraise and you can not negotiate a solution with the seller, you will not receive the real estate appraisal fee back, it is non refundable.
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There are two common methods appraisers use when evaluating a property. The sales approach, which is used in most residential transactions and the cost approach which is most beneficial in new construction. In the sales approach the appraiser estimates a subject property’s market value by comparing it to similar properties that have sold. The properties are called comparables or comps. Since properties are not alike or in the same condition the appraiser will make adjustments to the comps to make them more in line with the subject property. An example would be to deduct from a comp for additional square footage or a fireplace. This is done to show what each comp would have sold for if it had the same components of the subject property. The cost approach is basically an estimation of the replacement value of the property. After the home appraisal is complete a detailed report will be sent to your lender who will forward the report to you and your Realtor.
What if your appraisal comes back above the purchase price? Congratulations, you have instant equity in your new home. If the appraisal comes back below the purchase price, this can cause headaches, frustration, money and the possibility of not being able to purchase the property. The first step you and your Realtor should take is to counter the sales price to the appraised value. This can be done by your agent composing a simple addendum and sending it and a copy of the appraisal to the listing agent. If the sellers refuse to negotiate the sales price the appraisal contingency in your purchase agreement will allow you to back out of the agreement without penalty. If you have additional cash you can put more money down on the home and move forward with the deal. You would have to come up with the down payment as well as the difference between the purchase price and appraised value. For example you offer $200,000 on a home that appraised for $190,000, you would need to put down an additional $10,000. Always try to negotiate the sales price, even if the sellers meet half way to split the difference it would be helpful to you.
If you receive a real estate appraisal back that is low and you feel you have the documentation to prove it inaccurate you can contest it, but in reality not much can be done. To avoid unforeseen problems your Realtor should go over the comparables in the area in great detail prior to making an offer. If the home is in a multiple offer situation and you make an offer above list price, be prepared that the property may not appraise. Sometimes appraisals are just down right wrong and you need to know what your options are before being hit with the bad news.
In conclusion a residential real estate appraisal is strictly an opinion and if you were to hire 4 appraisers you may have four different values for the subject property. The Sales Team will be with you through the entire process and try to avoid the appraisal pitfall by doing research and offering sound advice prior to making an offer. If you have any questions regarding the appraisal process please feel free to contact us at your convenience. We look forward to assisting you.
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