Homebuyers and investors in real estate would do well to fully understand property appraisals, including how they work and what to do if theirs comes in too low. After all, an appraisal is a turning point in the real estate transaction — and can potentially make it or break it.
With that said, here is: home appraisal — everything you need to know.
An appraisal is a valuation of property such as real estate by an authorized individual who must be designated as such by a regulatory body governing the appraiser’s jurisdiction. In addition to real estate, such property can also include an antique, collectible, or business, for example.
Official appraisals, meant to be fair and unbiased, are commonly utilized to set a potential selling price for a property or item, and for insurance and taxation purposes.
Appraisals are also often conducted to establish the value of a charitable donation for itemized deductions. Some types of insurance policies that goods being insured are appraised. There may also be an appraisal clause that, in the event of a dispute between the owner and insurance company, the two parties will secure an appraisal from a mutually agreed-to appraiser.
Primarily, though, appraisals occur in real estate. They are a big deal, as mortgage lenders are apt to reject a loan application if the valuation is less than the home purchase price.
The process of buying or selling a home, or the refinance of an existing mortgage, usually requires a home valuation. In fact, an appraisal is an essential part of the process, as the outcome can potentially cost money, delay, or even scuttle the whole transaction.
The appraisal seeks to verify that the home’s sale price is aligned with fair market value. If it is, the investor or homebuyer does not pay more than the property is worth, and the lender does not lend more than the house is worth.
The appraisal’s accuracy is of utmost importance because the property secures the loan – it is the borrower’s collateral. The lender, likewise, will seek an appraisal to confirm market value when a homeowner is seeking to refinance their mortgage.
The different types of home appraisals include:
A home appraisal establishes the property’s value to make sure its price reflects the house’s condition, location, age, and features such as a finished basement or the number of bedrooms. Lenders benefit from valuations in that they are less likely to lend more than the property is worth.
Should the borrower default, the lender uses the appraisal as the home’s valuation should there be a subsequent default, wherein the home must be sold to recoup losses.
The process generally works like this: the appraiser will visit the property – the buyer and seller may request to be present — and utilize the collected information to establish an appropriate estimate for its value. At this point, the appraiser will also examine the values of comparable area homes. Subsequently, the appraiser will prepare an appraisal report that will include a dollar figure that represents the property’s perceived value.
Copies of the report, which will generally take a week to 10 days to complete, will go to the purchaser and their mortgage lender, although the seller may also request a copy.
Should the buyer dispute the appraisal report, they may seek a lender reconsideration or pay for a second appraisal.
There are a number of elements home appraisers consider when fixing a home’s value, including:
There are various valuation methods an appraiser can employ to determine a property’s appropriate value, such as comparing similar objects’ or properties’ current market value.
Appraisers charge either an hourly rate or flat fee for their services, which cost between $300 and $450 on average, often depending on the property’s size. Usually, the buyer is responsible for covering appraisal fees.
If a homebuyer’s valuation comes in under the purchase price, the buyer can choose to ask the seller to renegotiate the price to bring it closer to the property’s appraisal value. Another option, if the buyer has the means, is to make up the difference between the lender’s offer and the appraised value.
If the sale contract contains an appraisal contingency, the buyer can potentially step away from the deal and have their deposit refunded.
While appraisals are supposed to be objective, appraisers are people, after all. Thus, there are ways to optimize the valuation of one’s home that are not that expensive or time consuming:
Although the terms are often conflated, a home appraisal is different from a home inspection, which is conducted to establish the property’s condition and identify any prospectively serious issue before a buyer advances to closing. An appraisal assesses the home’s value as a dollar amount.
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Banks will generally not lend money if the property’s appraised value is less than the overall loan. So, appraisals are a necessary and crucial part of buying or selling real estate. That is why it is important to know what appraisers look for and what moves to make if the appraisal is too low. Remember, too, there are many ways to invest in real estate, which also serves the essential purpose of investment diversification.
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