A home appraisal is the process of determining a home’s true value. In this post, we’ll talk about why home appraisals exist and explain the process for how a licensed appraiser determines the value of a home.

Protecting the interests of the lender

Most appraisals are ordered by mortgage lenders as part of the approval process for originating a new loan. Lenders need to know the market value of a property to make sure they’re not lending more than it’s really worth. In most cases, appraisals come in around the same value as the listing price but it’s important to remember that the asking price is not always the true worth of a home.

An unbiased professional opinion

Home appraisals should be conducted only by licensed appraisers who are not involved in the real estate transaction. An accurate appraisal should be unbiased, which is why the fee is always paid directly to the appraiser.

What does a home appraisal entail?

Determining the current value of a given property requires a physical inspection of the home and an analysis of both the local real estate market and overall market trends.

Factors include:

• The recent sale prices of comparable properties in the same area
• Home amenities including total square feet, bedrooms and bathrooms, garage size, lot size and extras such as a deck, swimming pool, etc.
• Condition of the home, including the foundation, siding, roofing, chimneys, plumbing, insulation, electrical, heating and water systems

When the appraisal comes in at or above the contract price…

If the home appraisal on a property you would like to purchase comes in at or above the contract price, the transaction can continue as planned.

When the appraisal falls short of the contract price…

If the home you’ve made an offer on is valued less than your offer price, it is likely that the transaction will be altered. In this situation, the buyer has three options:

1. Renegotiate the purchase price: The buyer can ask the seller to lower their asking price based on the findings of the appraisal. This strategy is most likely to succeed in a non-competitive market or when the appraisal report highlights serious repair issues or major problems with the home.
2. Make up the difference in cash: Should the buyer wish to proceed with the sale and agree to pay a price higher than the appraised value, they may still be approved for financing by putting down a larger down payment to reduce the mortgage principal so that it is below or equal to the appraised value of the home.
3. Cancel the purchase agreement: Most purchase agreements include a contingency that permits the buyer to receive a refund of their earnest money should the home appraisal come in under value.

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