If you’re buying a home, you’re going to hear about appraisals more than a few times. Knowing what they are and why you need them is important, as is knowing some of the pros and cons of appraisals. As long as you’re getting a loan in order to buy the house, you’re going to have one conducted on the home (cash buyers do not have to get an appraisal, but it can still be useful). Appraisals have been a very big issue with transactions lately, so with that in mind, we thought we’d take some time to talk about them and what they mean to you…as a buyer and as a seller. For this first post, let’s just limit ourselves to what appraisals are and why they are necessary. Please note, when we use the word appraisal, we are not talking about what many people call “tax appraisals” or “market value” which we cover in depth in the post referenced.
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. Banks use it to ensure that their risk in making the loan is mitigated by the appraisal value of the home.
The actual appraisal process involves taking local comparable sales data and area conditions into consideration in order to come up with an appraised value. This is similar to the process your real estate agent 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 Banks Require Appraisals?
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 $200,000 and it appraises for $189,000, the bank will only make the loan based on the $189,000 figure, so it would be up to you as the buyer to come up with the additional $11,000 in cash on your own or back out of the sale. This can be a huge issue as most buyers are not prepared to come up with that much cash in the transaction (that’s why they’re getting a loan). The idea of appraisals is safety, security, and fair value for all involved, but it is there to protect the bank’s asset and assist them in evaluating the risk associated with making a loan.
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.
image courtesy of Images_of_Money