What is a home appraisal and why are they needed

If you are looking to buy or refinance your home, you may require a home appraisal. Home appraisals are a crucial and commonplace part of the home buying process. They help your mortgage lender determine the market value of your home and ensure a common understanding of your property’s value between you and your mortgage lender. Home appraisals play a key role in determining the amount of money that a buyer can borrow from a lender.  The amount a lender is willing to lend to you will always almost be based on the appraised value and not necessarily on the price you paid for the property.   For example, if you purchased a property for $600,000 and the appraisal comes back indicating that the property is worth $500,000, your mortgage lender will only lend based on the appraisal value, meaning you may have to come up with more money for your down payment.

In this blog, we will go over the process of home appraisals, common issues that come up, how appraisals are done, and what homeowners can do to ensure they get a great appraisal for their property.

What is a home appraisal?

A home appraisal is an assessment of a property's value by a licensed appraiser. The appraiser evaluates the condition of the property, its location, the market trends, and the current real estate climate in the area. The appraisal is done to determine the fair market value of a property. The fair market value is the price that a willing buyer would pay and a willing seller would accept in a real estate transaction.  Appraisers usually work for companies who are vetted by the lender to ensure a consistent approach to appraisals.

Why are home appraisals important?

Home appraisals are important for several reasons. Firstly, home appraisals help lenders determine the fair market value of your property. The appraised value helps determine how much money you can borrow from a lender. Lenders want to ensure that the amount of money they lend to a buyer is not more than the fair market value of the property. This is because the property is the collateral for the loan. If the buyer defaults on the loan, the lender wants to ensure that they can sell the property and recover their money.

What is the cost of a home appraisal?

Appraisal costs can vary depending on the property type, location, and other factors.  Typically you can expect to pay $300-$600 for a professional appraisal, however, that figure can vary.  The cost of the appraisal is usually paid for by the borrower, although some lenders may offer to cover appraisal costs.

What is the process of a home appraisal

Step 1: Ordering an appraisal The first step in the home appraisal process is choosing an appraiser. Your lender may have agreements with preferred appraisers, so it is important to seek their guidance as to which appraiser or appraisal company to use.  Appraisals can usually be ordered and paid for online through the major appraisal companies. It is important to choose an appraiser who is licensed and experienced in appraising properties in your area. The appraiser should be familiar with the local real estate market and should have experience appraising properties similar to yours.

‍Step 2: Preparing for the appraisal Once you have ordered an appraisal, you will need to prepare your home for the appraisal. This includes cleaning and decluttering your home, making necessary repairs, and ensuring that the appraiser has access to all areas of the property. You should also provide the appraiser with any documentation or information about the property that may affect its value, such as recent upgrades or renovations.

‍Step 3: Conducting the appraisal During the appraisal, the appraiser will conduct a visual inspection of the property. The appraiser will evaluate the condition of the property, its location, and any features or upgrades that may affect its value. The appraiser will also compare the property to similar properties in the area to determine the fair market value. The appraiser will typically spend about 30 minutes to an hour conducting the inspection.

‍Step 4: Analyzing the data After the inspection, the appraiser will analyze the data they collected during the inspection. This includes comparing the property to similar properties in the area, analyzing market trends, and reviewing any documentation or information provided by the homeowner. The appraiser will use this data to determine the fair market value of the property.

Common issues that come up during home appraisals

During the appraisal process, several issues may affect the appraised value of the property. Some of the most common issues include:

1. Property condition: The condition of the property can significantly affect its value. If the property is in poor condition or requires significant repairs, the appraiser may assign a lower value to the property.
2. Upgrades and renovations: Upgrades and renovations can increase the value of a property. However, it is important to note that not all upgrades and renovations have the same impact on the value of the property. The appraiser will evaluate the upgrades and renovations to determine their impact on the value of the property.
3. Location: The location of the property can affect its value. Properties located in desirable neighbourhoods or close to amenities may have a higher value than those located in less desirable areas.
4. Market trends: The real estate market can affect the value of a property. If the market is experiencing a downturn, the value of the property may be lower than if the market is experiencing an upswing.
5. Comparable properties: The appraiser will compare the property to similar properties in the area to determine its value. If there are no comparable properties in the area, the appraiser may need to adjust their valuation based on the available data.

What homeowners can do to ensure they get a great appraisal for their property

There are several things that homeowners can do to ensure they get a great appraisal for their property. Here are some tips:

1. Prepare your home: Before the appraisal, prepare your home by cleaning, decluttering, and making any necessary repairs. Ensure that the appraiser has access to all areas of the property.
2. Provide documentation: Provide the appraiser with any documentation or information about the property that may affect its value, such as recent upgrades or renovations.
3. Be present during the appraisal: Being present during the appraisal can be helpful as you can answer any questions the appraiser may have about the property.
4. Highlight upgrades and renovations: If you have made upgrades or renovations to the property, make sure to highlight them to the appraiser. This can help increase the value of the property.
5. Be realistic about the value: It is important to be realistic about the value of your property. Overpricing your property can lead to it sitting on the market for a long time, while underpricing it can mean you leave money on the table.

What is the appraisal comes in below the property's purchase price?

For buyers, having an appraised value come in lower than your purchase price will mean that the lender won’t be letting you borrow as much as you will need.  Most lenders have ratios in place that they would need to meet, so if your appraisal comes in lower than your purchase price, you will either need to make up the difference in cash, borrow the additional funds elsewhere, or, depending on your contingency clauses in your agreement of purchase and sale, you may be able to walk away if there was an appraisal contingency clause in the agreement.

The Bottom Line

Home appraisals are a crucial part of the home buying process. They help determine the fair market value of a property and help your lender make their lending decision. The appraisal process involves ordering an appraisal, preparing your home for the appraisal, conducting the appraisal, analyzing the data, and preparing the appraisal report.