What is an appraisal and why do you need one?
One of the most confusing aspects of obtaining a home can be the appraisal process.
Most people think when you buy a house that the selling price is the value of the home. The truth is, the value of the home is primarily based on other properties that have already SOLD in the same market area.
A real estate appraisal is the process of assigning an objective value for a home.
The buyer is free to pay whatever they like for the home. If the buyer intends on getting a mortgage, then they are required to get some type of home appraisal. The opinion of value (the appraisal) is based on properties (comparable properties) that have sold in the past.
Why Is a Real Estate Appraisal Needed?
Appraisals are an important part of the home buying process. A real estate appraisal establishes a property’s market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages.
What Is Comparable Property?
It is properties with characteristics that are similar to a subject property. The appraiser is looking for similar square footage, floor plan, the number of rooms, type of rooms and location to name a few. The best comparable could be the home next door or a few miles away. The best Comparable would be the house next door with the same floor plan, upgrades, view, everything exactly the same as the subject property that closed the day before the appraisal assignment.
When the home next door is not available the appraiser will attempt to find homes as close as possible and make adjustments. The adjustments are added or subtracted from the comparable property in an attempt to equal the subject being appraised. If one comparable did not have a 2 car garage like the subject. The appraiser would add the approximate value of the garage to the comparable to bring it up to the subject. If the comparable had a 3 car garage the appraiser would subtract from the subject the value of the extra garage.
Who Does the Appraisal?
Appraisals must be conducted by a licensed, third-party appraiser who has no connection to the buyer, seller or lender. That way, all parties can be sure the determined market value is fair, unbiased and free of any influence from any party that could benefit.
The lender usually orders the appraisal, but the borrower is the one who usually pays for it. The appraisal fee is an upfront, out-of-pocket expense that will not be refunded if either party fails to move forward with the sale.
What Does the Appraiser Look For?
Appraisers look inside and outside your house. They look at the neighborhood, too.
Externally, here’s what they look for:
- Neighborhood characteristics (i.e., urban, suburban, rural)
- Percentage of present land use in the neighborhood (one-unit housing, two- to four-unit housing, multifamily, commercial)
- Zoning classification
- Lot size
- Whether the property has public utilities
- The type of driveway surface and any car storage.
Internally, they look at things like:
- The home’s square footage
- Number of bathrooms and bedrooms
- Remodeled versus updated kitchen/baths
- Foundation type
- Whether there’s a full or partial basement, crawl space, or attic
- Materials used for the walls, floors, and windows
Get Preapproved First
An appraisal is one of the final steps of buying a home. Your first step should be to contact a lender near you to get the process started.
This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1.
I appreciated it when you shared that an appraisal is one of the final crucial steps of buying a home. My wife and I are planning to buy our first home soon as we want to have a proper home to accommodate our family. I think it would be great if we hire a reliable appraisal service that can help inspect the property before buying it.
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I am glad you mentioned how an appraisal is important to the home buying process to establish a property’s value. My husband and I are planning on purchasing a home this year. We will be sure to hire a property appraiser before we make any decisions to ensure that we pay the right price for the home.
I didn’t know that an appraisal is needed in order to establish a property’s market value, thanks for pointing that out. My uncle has a pretty wide property with lots of trees but it seems he is having trouble managing it. The issue seems like a handful considering the size of the property so I think he should ask for for forestry management services first.
Thank you for explaining how the lender usually will order the appraisal. I’ve been curious about this process since looking to buy a home. I’ll be sure to factor this into our budget so we can be more prepared for this.