What is an Appraisal?
When it comes to buying a house, there is so much to do even after you’ve made an agreement and created a purchase contract with the seller. One of the things you may have to do includes having the home appraised. In some cases you won’t, and it will depend on your circumstances. Appraisals are important, and while they might appear similar to inspections, they aren’t. The inspection looks for problems. The appraisal assigns a value to the home. Basically it answers the question, “How much is the home worth?”
Why Are Appraisals Important?
Appraisals are important for a number of reasons. The main reason is that you’re asking the bank to lend you a certain amount of money to be able to buy this home. Lenders are always looking out for themselves, and they typically only want to fund 80% of the value of the home. (Most down payments are 20%). Why? Well, if you default on your loan, especially early in the game, they want to be reasonably sure that they can get their money’s worth when they seize it from you and sell it.
If the appraised amount comes back lower than expected, the lender might not be willing to fund the amount that you need. Another reason to get an appraisal is that you don’t want to pay much more than the house is worth. If you’re set to pay $400,000 on a home that’s only valued at $250,000, it will be years before you can sell the home and make a profit (not considering renovations and improvements). Nonetheless, you should be aware that there will probably be some discrepancy between the sale price and the appraised value. Different appraisers will probably assign slightly different values to the same home as well.
What Does an Appraiser Look At?
Appraisers look at a variety of things, which may or may not include the following. Many appraisers will look at three different homes (their prices) in the area that are similar in size and type to the home being appraised in order to assign a value to the home under consideration. This is referred to as the comparison approach. Appraisers may also consider the condition of the home, its location, and anything in the area that may increase or decrease the home’s value. A home located close to a good school will likely be more valuable than a home located near the dump (all other factors aside). Another approach, the cost approach, gives you a value based on the amount of money it would take to replace the home if it were destroyed.
What Happens When the Appraisal is Lower than Expected?
If the appraisal is much lower than you expected, there are several things that you can do. First, you can back out of the deal. One of the contingencies in your loan contract should include the ability to find financing. Well, your lender is only going to finance so much, and the property is worth less than you thought, you might not be able to get all the financing you need.
Second, you can ask the seller to lower the price or make repairs (one factor that may impact the home’s value). Third, you can ask for a second appraisal or file a complaint against the original appraisal (if you truly think the numbers are wrong). Your realtor can also give you advice on how to deal with this type of situation.
In the End
Typically, the lender or your real estate agent will arrange for the appraisal to take place. It will usually happen fairly close to your closing date, and the cost for the appraisal is typically included in your closing costs.
What about You?
Have you ever dealt with an appraisal? Were you surprised by the results?