If you’re buying a home, you’re going to hear the word appraisal more than a few times. Knowing what one is and why you need one is pretty important, as is knowing some of the pros and cons of appraisals. Appraisals have been a very big issue with transactions lately, so with that in mind, I thought I’d take some time to talk about them and what they mean to you…as a buyer and a seller. For this first post, let’s just limit ourselves to what appraisals are and why they are necessary. Please note, when I use the word appraisal, I am not talking about what many people mistakenly call “tax appraisals” – we’ll need to cover that in an entirely different post.
What is an appraisal?
An appraisal is defined by Merriam-Webster as:
: an act or instance of appraising; especially : a valuation of property by the estimate of an authorized person
In the case of homes, a licensed appraiser is called on by the lender to value the home. This appraisal is then used by the bank to justify the cost of the home and back up their findings that determine whether or not they will make the loan to the buyer.
The actual appraisal process involves taking local comparable sales and area conditions in order to come up with a appraised value. This is similar to the process your real estate uses when determining the fair market value of your home when you put it on the market, but involves additional factors and considerations and must be done in compliance with appraiser licensing laws.
Why do I need an appraisal?
If you’re buying a home that involves a mortgage, you will need an appraisal. The appraisal is the bank’s proof that the home is really worth what you’ve agreed to pay for it. The idea is to give them the comfort of knowing that the home is worth that much and they’re not getting scammed or ripped off.
Banks will require an appraisal and if it comes in lower than the price you’ve agreed to pay for the home, the bank will not lend you more than the appraised value. For instance, if you’ve agreed to buy a house for $100,000 and it appraises for $99,000, the bank will only make the loan based on the $99,000 figure, so it would be up to you as the buyer to come up with the additional $1,000 in cash on your own or back out of the sale. This can become an issue as we will discuss in an upcoming blog post. The idea of appraisals is safety, security, and fair value for all involved.
Recently, appraisals have become a hot button issue, as appraisers are being much tighter with their values – this can be both a good thing and a bad thing, but much of it results from the housing market crash. We will get into that as well in the upcoming post(s).
image courtesy of Images_of_Money