How the Appraisal Works in the Home Buying Process
Are you thinking about buying or selling a home? Are you in the process? This is written for those who are buying or selling a home and want to know the role of the appraisal in the home buying process. Unless someone is able to pay cash for their home most home purchases involve a loan from a lending institution. Lenders require an appraisal of the property. Here are some things to understand about the appraisal:
The Appraisal Institute defines an appraisal as:
An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. . Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. (here is the link)
The appraiser will have a license to perform appraisals in the state the property is located. The appraiser will inspect the property and research the market. The appraiser find sales in the neighborhood that are similar to the property being appraised. These sales are called comparable sales. These sales will be adjusted for differences and are used in determining a market value opinion of the property being appraised. It is the appraiser's role to provide an unbiased opinion of value and to protect the lender from having collateral that is worth less than the loan and to protect buyers from overpaying for property.
Here is a sample from a report which show the property being appraised (referred to as the subject) and three comparable sales within the neighborhood. You can see where there have been adjustments made to the comparables for financing; bedroom counts, bathroom counts,gla (living area), and fireplace. Appraisers have been trained in ways to determine the adjustments. For an example of how adjustments are determined you can look here. You can see that after the adjustments were made the prices range from $260,060 to $271,270. The appraiser will give a value of opinion value between these two values and sometimes will place more weight on one sale based in its similarities to the subject. For this property the appraised value was determined to be $265,000.
The appraiser will contact the home owner to schedule an inspection of the property. The appraiser will measure the home and take pictures of the all of the rooms inside the home. Most appraisers will use either a laser measure or a tape measure. We actually use both forms in our practice. It is a good idea to give the appraiser a list of recent updates that have been done to the home or information that would help the appraiser in developing the opinion of value. For more information about what to expect in the inspection you can check out this blog post about what to expect in the appraisal inspection.
The appraisal is completed in the form of a written report that is sent to the lender. The report will contain many pages of information and can be 20-30 pages or more. Some of the main items that are included in the report are:
Here is an example of what the cover of the report might look like:
It is important to list your property properly within the market place. We suggest consulting a real estate agent or a real estate appraiser to help in determining how to price your property. Appraisers can provide a pre-listing appraisal which can help you properly price your home in the market. If you overprice your property and even if you have a buyer that wants to buy at your list price, unless that buyer is a cash buyer or has a large down payment it will difficult for the buyer to obtain the loan. The reason is that the loan amount will be based off of the appraisal. The appraisal is based off of recent similar sales and if there are no recent similar sales within the market that sold as high as your listing, the appraisal will not be the same as the sell price and the lender will not lend the amount of the sale price. If this happens the deal will completely fall through or the seller can negotiate with a lower sale price or the buyer can make up the difference with cash or both the buyer and seller give a little. If the listing is properly priced in the market this can all be avoided.
It is important to know that in most cases the borrower pays the appraisal fee and it is typically included in the closing costs. Although you pay for the appraisal, you do not own the appraisal as it actually belongs to the lender. You may request a copy of the appraisal from your lender. If the appraisal of the property is not what you expected please do not harass the appraiser. The appraiser has provided his/her opinion of value of the property based on their expertise and knowledge of the market. They have protected you from obtaining a loan for a property that is worth less than your loan amount. If you are disappointed in the value opinion of the appraisal you can read this post "Things to know and do if your appraisal is lower than expected"
We hope this helps in understanding the role of the appraisal in the home buying/selling process. Please feel free to contact us for any questions you may have at: www.dwslaterco.com
1. What is an Appraisal?
The Appraisal Institute defines an appraisal as:
An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. . Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. (here is the link)
The appraiser will have a license to perform appraisals in the state the property is located. The appraiser will inspect the property and research the market. The appraiser find sales in the neighborhood that are similar to the property being appraised. These sales are called comparable sales. These sales will be adjusted for differences and are used in determining a market value opinion of the property being appraised. It is the appraiser's role to provide an unbiased opinion of value and to protect the lender from having collateral that is worth less than the loan and to protect buyers from overpaying for property.
Here is a sample from a report which show the property being appraised (referred to as the subject) and three comparable sales within the neighborhood. You can see where there have been adjustments made to the comparables for financing; bedroom counts, bathroom counts,gla (living area), and fireplace. Appraisers have been trained in ways to determine the adjustments. For an example of how adjustments are determined you can look here. You can see that after the adjustments were made the prices range from $260,060 to $271,270. The appraiser will give a value of opinion value between these two values and sometimes will place more weight on one sale based in its similarities to the subject. For this property the appraised value was determined to be $265,000.
2. The Appraisal Inspection:
The appraiser will contact the home owner to schedule an inspection of the property. The appraiser will measure the home and take pictures of the all of the rooms inside the home. Most appraisers will use either a laser measure or a tape measure. We actually use both forms in our practice. It is a good idea to give the appraiser a list of recent updates that have been done to the home or information that would help the appraiser in developing the opinion of value. For more information about what to expect in the inspection you can check out this blog post about what to expect in the appraisal inspection.
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| Laser Measuring |
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| Tape Measuring |
3. The Appraisal Report:
The appraisal is completed in the form of a written report that is sent to the lender. The report will contain many pages of information and can be 20-30 pages or more. Some of the main items that are included in the report are:
- details about the property such as the size, age, condition, location, amenities, etc.
- a market analysis called a sales comparison approach which compares sales within the market to the property being appraised.
- a summary of the valuation
- supporting documents such as maps, photos, and sketches
- a value opinion of the property
- certification and qualifications of the appraiser
Here is an example of what the cover of the report might look like:
4. Note to the Seller:
It is important to list your property properly within the market place. We suggest consulting a real estate agent or a real estate appraiser to help in determining how to price your property. Appraisers can provide a pre-listing appraisal which can help you properly price your home in the market. If you overprice your property and even if you have a buyer that wants to buy at your list price, unless that buyer is a cash buyer or has a large down payment it will difficult for the buyer to obtain the loan. The reason is that the loan amount will be based off of the appraisal. The appraisal is based off of recent similar sales and if there are no recent similar sales within the market that sold as high as your listing, the appraisal will not be the same as the sell price and the lender will not lend the amount of the sale price. If this happens the deal will completely fall through or the seller can negotiate with a lower sale price or the buyer can make up the difference with cash or both the buyer and seller give a little. If the listing is properly priced in the market this can all be avoided.
5. Note To the Buyer:
It is important to know that in most cases the borrower pays the appraisal fee and it is typically included in the closing costs. Although you pay for the appraisal, you do not own the appraisal as it actually belongs to the lender. You may request a copy of the appraisal from your lender. If the appraisal of the property is not what you expected please do not harass the appraiser. The appraiser has provided his/her opinion of value of the property based on their expertise and knowledge of the market. They have protected you from obtaining a loan for a property that is worth less than your loan amount. If you are disappointed in the value opinion of the appraisal you can read this post "Things to know and do if your appraisal is lower than expected"
We hope this helps in understanding the role of the appraisal in the home buying/selling process. Please feel free to contact us for any questions you may have at: www.dwslaterco.com
Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use. This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non real estate purpose. If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com.
Great information on how the appraisal works! Understanding the steps of the appraisal is very helpful.
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