What Is A Real Estate Appraisal?
A real estate appraisal is an estimate of a home’s fair market value.
A lender will use a real estate appraisal to determine if the home’s contracted price supports the actual value of the home being purchased, given the home’s condition, location, and features.
The lender does this in order to protect their vested interest in property (the loan of the money for the purchase of the home). They do not want to over lend on a home, so a real estate appraisal is performed by a certified licensed appraiser to make sure that the home value aligns with the price that the home is contracted to sell for.
Appraisals can be confusing to home buyers, especially first time home buyers, who have never experienced the process before. Once the buyer and seller have agreed on a price for a home, an appraisal is ordered to assign a value to the home.
The appraisal is the bank’s way to ensure that they are not loaning more for the house than the actual market value of the property.
One of the most frustrating things to hear after agreeing on a sales price is that the appraisal has come in too low, therefore not satisfying the agreed-upon contract price.
What Is Market Value?
Market value is the price that someone would be willing to pay for a house that could be supported by comparable sales in a specific geographical area.
An example: Someone is selling their home for $250,000. The most anyone is willing to offer for the home is $200,000. Given that other similar homes in the area have sold around $200,000, it would be a risk for the buyer to pay $250,000 for this home.
So, while this house is being offered at a higher price, the probable market value would be closer to $200,000.
How Is The Market Value Calculated?
A licensed appraiser will verify the legal descriptions of the real estate property in the public records and will take photographs of the interior and exterior of the property.
They will overview the property, all of its features and conditions, then analyze these components and compare it to other similar properties nearby the subject property. This will assist them in running a comparable market analysis on the subject property.
The comparable market analysis (CMA) is done to compare the home to similar nearby properties that have recently sold, to help determine the value of the house.
When doing a CMA, the appraiser will look for homes that are within a close radius of the subject property (the property they are appraising). They will choose homes with similar features such as size, amenities, condition, and location.
The appraiser then makes adjustments for the differences in the homes being compared. These adjustments are made by increasing or decreasing valuation based on local economic conditions such as building costs and labor fees to assign value.
For instance, if the subject property only has a one-car garage, but nearby comparables have two-car garages, an assigned cost adjustment for this will be made.
Other determining factors that appraisers take into consideration that influence the value and support the addition or subtraction from the subject property are based on things such as size, location, lot, condition, upgrades, and so forth. Once they have completed the CMA, they will be able to more accurately pinpoint a valuation (appraisal) of the subject property.
What Happens After The Appraisal?
Once the appraisal has been completed, the appraiser will send their completed report to the lender. The lender will then study the appraisal and use it to determine if they will give the full loan amount to the buyer of the property.
If the home does not appraise high enough to support the contracted price, the buyer and seller can choose to make up the difference in the sales price, lower the price of the home, or cancel the sale.
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