Once a buyer and seller have agreed on a purchase price, the next step in the home buying process is the appraisal. This is a necessary step – one that could affect the outcome of the sale – so it’s important to be familiar with the appraisal going into it.
Let’s take a crash course into the topic.
What Is An Appraisal?
An appraisal is an opinion of a home’s value conducted by a licensed expert. It helps parties determine if a contract price is appropriate, in relation to what the home is worth. While most buyers will want to have this done – after all, you don’t want to pay a price that’s well above the value of the home – it is almost always a requirement if you plan on obtaining a mortgage.
Let’s imagine that a home is listed for $200,000 but is valued at $100,000. Because the house is used as collateral for a mortgage, a lender will not want to give out more money than the house itself is worth.
The appraised value is influenced by trends in the market and the value of recently-sold homes in the area.
When Is An Appraisal Done?
An appraisal is performed after the parties have agreed on a price and have a contract, but before closing is done. Many contracts will include provisions related to the outcome of an appraisal, so be sure to review your documents with your Realtor so that you can be clear about next steps following the appraisal.
If the appraised value is in line with the contract price, then the parties can usually proceed to closing.
However, if the appraised value comes in lower than anticipated, extra steps may need to occur before closing can happen
- The seller can lower the sales price to an amount more aligned with the appraised value OR
- The buyer can produce additional funds for a larger down payment so that the loan amount is lower
How Is An Appraisal Conducted?
A home inspection is done in a few steps. First, the appraiser will do a walkthrough of the home and make note of the condition and features in the home. This includes the structure, systems, and any improvements that could have an effect on value. Next, the house is compared to similar houses recently sold in the area (called “comps”) in order determine a fair value. The appraiser will use and prepare:
- Exterior sketches
- Photographs (house and comps)
- Street maps highlighting the property and any comps used
- Additional supplemental information to support findings
The entire process can take several days to over a week (for example, VA appraisals can take up to 2 weeks to complete), at which point a final report is completed and provided to the buyer.
Many people wonder why an appraisal is needed when a home inspection is also done. This is a common question that arises. The appraisal will determine the value of the home, while an inspection focuses more on condition of structure and systems within the home. Because the parties are looking for different information, the steps taken during each process is different from the other.