Let’s be honest here. This subject is a little dry. But it is good to know. And if you’ve ever bought, or are planning to buy a home, chances are, an appraisal was, or will be, part of the process.
Appraisers, who are usually hired by a lender, will look at the condition and features of your home and compare them to other similar homes in the local area. It sounds simple enough but, if there haven’t been a lot of similar homes that have sold recently, the appraiser will have to use all their expertise and use homes that aren’t similar, or hyper-local, help to determine the value of the subject property. It can be a tricky job.
Most appraisals are done when a buyer is in the process of securing a home loan or when a current homeowner decides to refinance. The are other reasons for doing an appraisal too. For instance, when a homeowner wants to stop paying mortgage insurance or wants to refinance. Or when a seller finances a loan for a buyer. Most of the time the buyer, or homeowner, pays for the appraisal.
Why?An Appraisal is how the bank protects itself from lending money on a home that isn’t worth what the buyer is paying for it. If the buyer gets in financial trouble someday and ends up in default, the lender isn’t stuck with a property that’s worth less than the mortgage they’re holding.
How an Appraisal Protects the Buyer
For the same reason a bank wants an appraisal, a buyer should want one too. What if you needed to move and found out you wouldn’t be able to pay off your mortgage when you went to sell. Nobody wants to be stuck “under water” on their home. Also, your home isn’t much of an investment if you overpaid for it. You wouldn’t pay $50 a share for a $40 stock and wait for the value to catch up would you? Of course not!
How an Appraisal Affects the SellerEvery seller crosses their fingers and prays that the appraisal “comes in.” In other words, the bank agrees that what the buyer is paying for the home reasonably reflects its value. A word of caution: While the market is shifting, we still have multiple offers in some of the lower price points. If a competitive buyer makes an offer way over value, it might not be the best offer to accept. If you’re forced to renegotiate after a low appraisal, the buyer might just use it as an excuse to walk away from the contract. Better to accept the offer that’s within reasonable value and raise your chances of getting to closing.
So that’s The Appraisal in a nutshell. Next time you see a hard working appraiser, give them a smile. It’s quite possible, that without them, buyers might have pushed prices completely out of control in the recent seller’s market.