What is a home appraisal?
Mar 2, 2021
What Is A Home Appraisal?
Home appraisals are an important part of buying or selling a home, but you may not know exactly what it is or even why it's important to have it done. If you're buying or selling a home, you'll want to understand the process and why it's important.
Our experts at Orizon Real Estate have compiled this handy guide to help you understand what a home appraisal is and how to prepare for one.
WHAT IS IT?
A home appraisal is a valuation of your home conducted by a licensed professional. An appraiser will inspect your home - inside and out - to determine an estimate of its true value (not the list value of your home).
A lender will use this information to ensure that a buyer isn't over-borrowing money or that the lender would be able to recoup their money in the event of foreclosure.
Appraisals will be ordered by the lender - not the buyer or seller of a home - with the buyer paying the costs of the appraisal.
In general, a home appraisal will be valid for about four months.
WHAT ARE THEY LOOKING FOR?
The value of a home is determined by a lot of different factors. Inside the house, appraisers look at things such as the amenities, the general condition of the home, the total square footage of the home, and the condition of the walls and floors. Externally, appraisers look at factors such as the recent sale price of similar homes in the area, the size of the lot, and trends in the housing market.
Improvements to a home are also included in the valuation process. It can include things such as new fencing, a replaced room, an updated air conditioning unit, or a deck.
Appraisers will likely use the Uniform Residential Appraisal Report from Fannie Mae in order to help them quantify the value of the home.
The final report will also include sketches of the exterior of the home - made by the appraiser - as well as photographs and other relevant records.
WHAT'S NOT INCLUDED?
In simple terms, if it's not nailed down then it won't be considered in the value of the appraisal.
The decor and aesthetic of the home won't add any value to the appraisers report. Surprisingly, things like updated ceiling fans, utility sheds, and hot tubs are not considered for home value, though as your real estate agent will tell you, those items are still important for marketability.
APPRAISAL VS. INSPECTION
An appraisal and an inspection are vital parts of the home buying process, but the information they provide the buyer and seller are vastly different.
The intent of the appraisal is to create an estimated value of the home and the property. A home inspection, on the other hand, is intended to provide a checklist of structural and mechanical integrity of the home. The home inspector will provide a list of recommended repairs, while an appraiser will not.
A home will usually be appraised after an inspector has completed their review of the home.
WHAT DO BUYERS NEED TO KNOW?
You'll encounter the appraisal in the home buying process when it comes to closing time.
If the appraisal is at or above the price you agreed to in your contract with the seller then the sale will continue as planned.
If the appraisal comes in below the price you contracted, then there could be delays in the sale. Low appraisals aren't uncommon. In fact, low appraisals accounted for 18 percent of all delays in home buying, according to a January 2020 report by the National Association of Realtors Research Group.
As discussed earlier, a lender will not want to loan anyone more money than the value of the home that's being purchased. This gives you, the buyer, an advantage; it allows you to renegotiate a lower price for the home you're trying to purchase.
Some sellers may feel that the lower appraisal isn't accurate and may not want to reduce the price of the contract, though. A second appraisal may be needed in order to confirm the value of the home.
WHAT DO SELLERS NEED TO KNOW?
As a seller, you need to be ready and prepared for the eventuality that your home is appraised lower than your list value or your contract value. That doesn't mean you're stuck, though.
You can ask for a second appraisal, as mentioned earlier. In some cases, the value of your home could be dragged down by a spate of foreclosures near you, so it's worth doing your homework about homes in your area.
You can also potentially hold out for an all-cash buyer who won't require an appraisal of the home, however this is unlikely to net you a higher sale price.
HOW TO GET READY FOR AN APPRAISAL
It's best to treat your home just like you would treat a vehicle that you're trying to sell.
Mow your lawn, declutter your home, replace worn or faulty hardware, and plant new flowers. Getting everything cleaned up, put in order, and fixing minor blemishes may not add actual value to your home, but first impressions are important.
Upgrade or improve any parts of your home that you're able to afford, such as the roof, furnace or AC unit. Waiting to repair parts of your home in anticipation of a sale will only cause the issues related to them (such as a leaky roof) to get worse and potentially affect the value of your home.
You want to document any improvements you make and save receipts to give to the appraiser; the difference between a $10,000 roof and a $30,000 may not be easily visible by the naked eye, but it's hard to ignore when it's black-and-white on paper.