Buying a home can be a tough process, no matter how much experience you have. Since there are quite a few steps involved in buying a new home, it can get a little chaotic for those who aren't sure about the different processes taking place. A lot of the time, there is plenty going on in the background of a mortgage transaction that home buyers don’t understand, even though they are expected to pay for some of it.
While purchasing most things is simple and straightforward, larger investments such as purchasing a car or a home require a little more effort from all parties involved. Buying a home might just be the most complex transaction of them all. After all, buying a home is usually the largest investment made by the average person in a lifetime.
Still, the time and energy that goes into even the smallest home purchase is commendable. Everything that takes place during the transaction is a carefully thought out process meant to protect the investment for both the home buyer and the lender. That typically includes (and is not limited to) heavily scrutinizing the borrower’s finances, thoroughly researching the property’s title, inspecting the property, and finally, ordering a home appraisal.
While things like a title search and a home inspection easily sound fair, many home buyers tend to miss the importance of a home appraisal. It’s actually quite common for many to wholeheartedly believe that the listed price of a home for sale reflects its true value. Ultimately, this couldn’t be more false.
When a home is listed for sale, it isn’t uncommon for homeowners to add or subtract value from the listing price in order to better suit their needs. For example, a homeowner looking to make a predetermined profit off of a home sale may increase the sale price by an extra $20,000. Conversely, it isn’t uncommon for a seller to reduce the price by a similar amount if they’re trying to get rid of the property faster.
Basically, the big takeaway is that the sale price of a home does not accurately reflect the actual market value of that home. Of course, that price is based on something. This is where a home appraisal comes into play.
What is a home appraisal?
A home appraisal is an educated, unbiased and professional opinion of the value of a home. The appraisal gives the bank a guarantee that the home is at least worth the amount being loaned. Appraisals are also used by city governments to determine the amount of taxes that are levied against the property. They are also extremely useful for home buyers, as they provide clarity as to the value of a home being purchased in relation to its listed sale price.
Home appraisals are based on an analysis of the current sales of similar properties on the market in the area, the property’s physical condition, the size of the home, and the location of the property. Appraisals must be completed by licensed or certified appraisers, and are a standard process during any mortgage transaction. They are usually paid for at closing. Lenders typically require appraisals before approving a borrower for a loan.
How do Appraisers Decide the Value for a Property?
There are a variety of methods used by a trained, licensed or certified home appraiser to determine the value of a property. There are two commonly used methods known as the ‘Cost Approach’ and the ‘Sales Comparison Approach’.
In the Cost Approach, the appraiser will determine the cost of creating a replica of the home or rebuilding the home utilizing current methods and materials. The appraiser will be looking for any upgrades, added amenities and recent repairs done in the home. They will then determine the lot value and estimate the depreciation of the improvements to calculate the appraised value of the home.
The Sales Comparison approach is the most frequently used method and is mainly used to indicate the market value of the property. In this approach, the licensed or certified appraiser selects similar properties recently sold in the local area, collects basic information, and completes an adjustment process to establish the value. The factors taken to consideration include physical features of the property, improvements, neighborhood features, time of sale, terms of the sale, property rights and condition of sale.
Often times, the appraiser will utilize both methods in order to provide a highly accurate value of the property.
What is the Cost of a Home Appraisal?
Since they’re a standard part of the home purchase process, and a necessity in order to get a home loan, home appraisals are quite a common practice. Still, they are typically carried out by a licensed third party that requires payment for the service. Home appraisals typically account for one of the many closing costs associated with purchasing a home.
For a home purchase, the cost of a home appraisal can be anywhere from $300 to $400. The national average cost of a home appraisal is currently at $309.
Why is a Home Appraisal needed?
There are three reasons one would require an appraisal of their home. The most frequent reason is to help aid in the purchase or sale of a property. The second reason is to be approved for a mortgage or home refinance. This is because all lenders require home appraisals to ensure that the home value is greater than the loan amount. The third reason for an appraisal is to aid in the determination of property taxes a homeowner will need to pay.
Home buyers should find this information important, as they’re the ones looking to borrow a large sum of money in order to gain ownership of the property in question. Knowing the true value of a home is a necessity when so much money is at stake. Sadly, home appraisals typically take place after a sale price is agreed on. However, this still gives a home buyer enough wiggle room to further knock down the price, call off the deal, or even request that the seller pay some of the closing costs in order to offset the difference.
For this exact purpose, there should be a stipulation in the sales-and-purchase agreement that addresses the possibility that the property’s appraisal value may come in below the purchase price, and allow the home buyer to terminate the contract or renegotiate the sale price. It is always recommended that home buyers make sure this provision is included, or else they may risk losing thousands on a home purchase.
In terms of a mortgage transaction, more often than not, a lender will not consider loaning more than the assessed amount shown on the appraisal. This is because the lender will use the property as collateral and must ensure they can recover in the event of a borrower defaulting on the mortgage loan. Effectively, a home appraisal lets the lender know what the home can be sold for under the worst market conditions should the need arise in a foreclosure scenario.
Lastly, home appraisals are used by local governments to help assess the amount of property taxes to levy on a property. When taxes are to be evaluated and redetermined (sometimes through the contestation of a homeowner), local governments have home appraisers that are deployed in order to determine the values of properties within the jurisdiction of their municipality. The property taxes levied against a property use the tax rate of the city against the taxable value of a home, so having an accurate appraisal is key to the formula.
Home Appraisals: In Review
All in all, the importance of getting an accurate home appraisal simply cannot be stressed enough. Home appraisals are utilized by both parties during the home purchase process, as well as by the government to aid in the determination of property taxes. There is no substitute for an accurate home appraisal in order to find a property’s current market value.
Whether you need to know how much to list your home for, or how much money to offer a seller, getting a property appraised is an invaluable resource when negotiating a mortgage transaction. While home appraisals add to the extensive list of closing costs and fees, they are not an item to be overlooked. If you'd like to learn more about home appraisals, we can help you with any questions you may have. All you have to do is contact a home.loans mortgage specialist!