Anyone who has mazed through the home-buying or home-selling process is aware that an appraisal is a crucial step toward a successful transaction. The process and its purpose, however, aren’t entirely crystal clear, particularly among first-time homebuyers.
A real estate appraisal determines a property’s value through a third-party evaluation of the home’s fair market value. This valuation is conducted by a team of professionals who operate under regulatory guidelines.
Home value is based upon several criteria, including the home’s size, location, comparable home sale prices, condition and nearby amenities and neighborhood-friendly destinations. The appraisal amount is used to help inform the pricing of homes, while also offering both parties financial protection and negotiation leverage. Appraisals are also useful for insurance, taxation and banking purposes.
In short, an appraisal establishes a property’s value for the purposes of conducting business. An appraisal is like grease that allows the wheels of buying and selling a home to smoothly proceed.
Read on to go beyond the basics of what appraisals are and why they are such an integral function to homebuying and selling.
It’s unbiased
While the appraisal is an opinion of a professional, it should be taken seriously and given the involved parties full confidence that it’s fair and accurate.
Refinancing tool
Real estate appraisals are a major tool for home refinancing, as well. Banks rely upon the findings of the appraisal to guide financial decisions that plot the course of the applicant’s goals. For example, refinancing lets homeowners pull equity from their property. The cash-out refinance loan amount is folded back into the updated loan.
In essence, the appraisal gives lenders assurance that the refinance loan amount is in alignment with the property’s fair market value.
Protects all parties
Appraisals protect lenders from over-lending and borrower default. If the home slips away from the buyer, the lender will begin the foreclosure process to recoup funds. The appraisal is a guardrail throughout. It helps ensure that lenders do not take on too much financial liability when the loan is approved, and it softens the lender’s financial hit in a worst-case scenario.
Lender typically orders appraisal
For the reasons above, lenders will require the appraisal process and include it as a fee to the borrower. While lenders generally order appraisals, they are not in direct contact with the professionals who handle the process. Appraisal management companies help facilitate instead. In this manner, all parties will enjoy the benefits of third-party’s due diligence and independence.
Appraisal fees run between $200 and $600, but they will vary based on location.
What’s in the report?
A real estate appraisal report lists specific details about the home. It also analyzes similar properties side by side to gain an understanding about current average home values.
The pace of real estate activity is also tracked in the report as market conditions have a big say in value. Appraisers are also tasked to report on concerns about the home that could impact value. Major home defects will also be noted. The report will also describe physical characteristics of the neighborhood and area traffic levels.
Contact information and licensing details will be included.
Appraisals can be challenged
In consultation with the real estate team, the borrower or seller can raise questions about the appraisal’s findings. If you feel mistakes occurred, there may be recourse in the form of requesting a new appraisal.
Because a lot hinges on the appraisal, any decision to make this request must be backed up with solid justification. The appraisal company may be happy to oblige, especially if the questions raised seem reasonable and worthy of a second look.
If you have any questions about appraisals, contact us today.