Home Appraisals: Everything You Need To Know
If you’re looking to buy a home, something you’re going to come across is a home appraisal. But what exactly is a home appraisal and why is it important? We're diving into it here so you can better understand everything you need to know about this process and how it’ll affect you as a home buyer.
What is a home appraisal?
A home appraisal is a process wherein a third-party professional comes in to fairly evaluate the value of a house. All 50 states require that these professionals be licensed or certified and complete their assessments free of bias by having no direct or indirect interest in the transaction.
How long does it take?
The whole process can take anywhere from a few days to several weeks with the appraisal itself taking anywhere from 15 minutes to several hours depending on the size of the property. Much of the property’s value will be determined by the area in which the house is located, recent sales of similar types of property, as well as overall market trends. Amenities such as the number of bedrooms and bathrooms, square footage, yard size, floor plan functionalities and the like can all be factors in determining the value of a home. Negative visible qualities of a home can also adversely affect the determined value as well.
How it is done?
An appraisal can be done in one of three ways: hybrid, desktop and drive-by appraisals. Hybrid appraisals leverage information from third-party sources to assess the value of a home without physically needing to enter the home. Appraisers may use photographs from a home inspection or hire someone to gather site-specific information they need to comply with a lender’s requirements. Desktop appraisals, which have greatly increased in popularity, is much like a hybrid appraisal but does not involve any third parties. The appraiser only uses information they are able to find online such as property records, floor plans, and comparable listings. Last but not least, drive-by appraisals are exactly what they sound like. Sometimes known as exterior-only appraisals, drive-by appraisals are not as in-depth as the other options can be good enough in certain situations.
Do keep in mind though that a home appraisal is actually different from a home inspection. Home inspections will be a much more thorough process where the inspector will assess whether all systems within a home are functional and free of damages that will need repairs. An inspector may test outlets, test the HVAC system to ensure it can hold a stable temperature, check to see the roof has been properly installed, and make sure that the plumbing system is running properly. An appraiser unfortunately may not go as in-depth as this and will likely keep their evaluation of a home based strictly on visual qualities.
Why are appraisals important?
The reason appraisals are important is because they protect all parties involved. For the lender it enables them to make a well informed decision on whether or not to make a loan and can ensure they are now lending out more money to a buyer than the home is worth in the chance that they default on their mortgage. This can just as well apply to the buyer by making sure they understand the fair market value of a home and are not overpaying for the property. It’s possible that a buyer may want to bid higher than the fair market value to make their bid more attractive to the seller but in these cases lenders will often require the buyer to pay the difference out of pocket which is something you will definitely want to take into consideration. Now if in the future you find yourself on the sell-side it’s still just as important to get an appraisal completed because that will help you determine what price to list your home at and how to effectively negotiate during the selling process.
What does it cost?
Now you may be wondering, who pays for all this? The answer to this is that typically these costs will fall on the buyer where single-family home appraisals will cost somewhere in the range of $300-$400 while multifamily units can cost upwards of $600. These prices can be even higher if you are looking at a property in a more remote area as there are likely fewer qualified appraisers and even those that are available may need to drive a significant distance to get the appraisal completed.
The outcome of all this can go one of a few ways. The home can end up being prices just right or even above the agreed upon price in which case you as a buyer are golden, the latter of which is going to leave you better off. However if the value of a home is determined to be significantly less than what you’ve bid for the property you may run into some trouble. This outcome can actually derail a transaction altogether because a lender may not be willing to make the loan. If you believe the appraiser may have made a mistake based on imperfect information you can always appeal to have the appraisal revised. Alternatively you can always look to get a second opinion but this of course will cost you because you’re basically doing a second inspection. The last option, given that your lender is still willing to work with you, is simply to pay the difference out of pocket. Lenders will not be willing to lend you more than the house is worth to limit their risk and as such it will be up to you whether you want to take on the financial burden of the difference in value between your bid and the appraised value of the home.
If none of those options seem viable for you then unfortunately you may need to walk away from the deal and find another property but don’t feel too bad about it because ultimately this may turn out to be a blessing in disguise. You may overtime come to realize that the appraisal actually helped keep you from buying a home you could not afford and put you in a position to find a more appropriate home for your budget.
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