Understanding Home Appraisals
Whether you are buying or selling your home, one of the major factors in the process is the home appraisal. In some cases, the appraisal will be waived, but most of the time this is an essential component to ensure fair real estate deals are taking place. To help you better understand the home appraisal process, we have highlighted the fundamentals of the process below.
What is a home appraisal?
A home appraisal is an unbiased, professional opinion from a third party about the value of a real estate property. The appraisal will be conducted by a certified appraiser and is required in most cases by a lender before issuing a loan. The appraised value of the property is based on multiple factors, including:
- Square footage
- Condition and age of the home
- Size of the lot
- Recent sale prices of comparable properties in the area
- Nearby amenities
- Amenities in the home, such as a fireplace or covered patio
- Topography and usability of the lot
- Building materials
In some cases, the appraisal will result in an “as-is” value and a “subject-to” value in the case of rehab. This means the property value is established in its current condition, as well as what it would be worth on the condition of certain repairs being completed.
Why do I need a home appraisal?
A home appraisal is designed to protect both the buyer and the lender. A professional appraiser's job is to determine whether the purchase price of the home and the home's actual value match up. If you are buying a home without a loan, you don't have to have an appraisal at all.
You may still want to consider an appraisal, as it may help you identify whether your investment is wise. Every case will be different, depending upon current market trends, your financial situation, what you plan to do with the home, and how long you expect to own it.
How much does an appraisal cost?
In most cases, an appraisal will cost between $300 and $400. Some more complicated properties may cost up to $1000 for appraisal, but this is rare. In some cases, an appraiser may also charge more if the condition of the home or inclement weather makes the job more time-consuming or hazardous.
What happens if the home does not appraise as expected?
It is possible for the home to appraise at a lower price than expected, resulting in a problem with funding. The problem is based on something called the loan-to-value (LTV) ratio. This is the ratio of loan principal to appraised value; the lower the LTV, the less risk for the lender. For example, if you borrow $160,000 for a $200,000 property, the LTV is 80% because the loan equals 80% of the property's value.
Remember, the LTV is based on appraised value, not on the purchase price.
If the seller accepted an offer that is higher than the appraised value, there are two ways to resolve this issue and continue with the transaction:
- The seller can agree to lower the price to meet the appraised value, lowering the LTV
- The buyer can put down a larger down payment, lowering the LTV
Should I waive a home appraisal?
Especially in competitive real estate markets, many buyers consider waiving an appraisal in order to buy a property quickly and put in a competitive offer. In some cases, this will pay off, but in others it may result in a major headache down the road.
If you want to purchase a home without an appraisal, make sure you can do so confidently by hiring a professional home inspector to identify any hidden issues, getting counsel from your real estate agent about the market in the area, and having a cushion in place if the home dips in value for a time.