What is a home appraisal? Everything you need to know

A crucial step in the home buying process is the appraisal, where an objective professional evaluates a property to determine its value. This assessment ensures that the sale price aligns with fair market value, protecting both the buyer and the lender from overvaluation. In this guide, we’ll delve into the intricacies of home appraisals, why they are essential, and how they can impact your home loan.

What is a Home Appraisal?

A home appraisal is a professional, unbiased assessment of a property’s worth. Whether buying or selling a home, this process verifies that the sale price is fair, preventing overpayment or over-lending. For homeowners refinancing their mortgage, an appraisal confirms the property’s market value before extending a new loan.

The Appraisal Process

1. Lender Orders the Appraisal: After an offer is accepted and a purchase agreement is signed, the lender orders an appraisal for homebuyers. For refinancing, the appraisal is typically ordered after applying for the new loan.
2. Assessment of the Home: A licensed appraiser conducts an on-site or remote evaluation. The duration of this assessment depends on the size and complexity of the property.
3. Review of Comparable Properties (Comps): The appraiser analyzes recent sales data of similar properties in the area to establish a benchmark for the property’s value.
4. Report and Valuation: The appraiser compiles their findings into a report, often using the Uniform Residential Appraisal Report. As the borrower, you are entitled to a free copy of this report before the loan closes.

Factors Considered in a Home Appraisal

• Location and neighborhood characteristics
• Square footage of both the house and lot
• Layout and amenities of the house
• Condition of the property’s structure and systems
• Hazards or adverse conditions
• Age and condition of foundation, roof, and walls
• Recent sales trends and price ranges of comparable homes

Determining a Home’s Value

Appraisals are based on a multitude of factors, including location, size, amenities, and condition. Additionally, the appraiser considers comparable sales and local market trends.

Dealing with a Low Appraisal

If an appraisal comes in lower than expected, it can pose challenges. Review the appraisal report for potential errors. If a contingency is in place, you may choose to renegotiate the price or back out of the deal. For refinancing, you can offer to make up the difference or seek a second opinion if factual mistakes are suspected.

Preparing for a Home Appraisal

For Homebuyers:

• Understand contingencies in the purchase agreement.
• Avoid overbidding in a competitive market.
• Acknowledge that the outcome is beyond your control.

For Refinancers:

• Provide a list of comparable properties to the appraiser.
• Document property improvements with photos and receipts.
• Present your property in the best possible condition.

Alternative Valuation Methods

While appraisals are the most accurate valuation method, comparative market analyses and automated valuation models like Zillow’s “Zestimate” are available. These tools offer insights into the market, but they may not provide the same depth of analysis as a human appraiser.

Home Appraisal vs. Home Inspection

It’s important to differentiate between an appraisal, which determines the value of the home, and an inspection, which evaluates its condition. Inspections focus on the property’s structure and systems to identify potential issues that may need addressing.

Conclusion

A home appraisal is a critical step in the homebuying process, ensuring that the property’s value aligns with fair market standards. Understanding the appraisal process and being prepared can help streamline the transaction and prevent potential setbacks. By recognizing the significance of appraisals, buyers and sellers can navigate the real estate market with confidence.