When you are buying a new home, one of the most important pieces of information you need to collect is the estimation of the home's current market value, also known as the appraisal. The job of putting together the estimation falls on a real estate appraiser, who calculates it by comparing the recent sales of homes in the area to the property that is being appraised.
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Although the primary beneficiary of an appraisal is the mortgage lender, no buyer wants to overpay for a property either. It helps to get an overview of the appraisal process before jumping in.
So, what exactly does a real estate appraiser do? And how do they determine the home's value? Here's what you need to know.
A real estate appraiser is the person who develops an estimate of the valuation of a property after reviewing comparable sales in the neighborhood.
What Is an Appraisal?
Most homebuyers finance their purchase with borrowed money. The lender usually secures the loan by taking a security interest in the home. If the borrower stops paying down the loan, the lender has the right to sell it to recoup its loan. That makes it critical for the mortgage lender to know the current fair real estate market value of the home before agreeing to a loan. If it writes a mortgage for more money than the property is worth, it will have little chance of recouping its loan amount if the buyer defaults. The lender that is considering the mortgage uses an appraisal to determine whether and how much it is willing to lend on a particular property.
An appraisal is an estimation of the current real estate valuation of a property, undertaken at the lender's request by a real estate appraiser. While many states require that these professionals are licensed appraisers, not all impose this requirement. If an appraisal is done for the lender during a home purchase, the appraiser is selected by the lender, but it is the borrower/homebuyer who pays for it (unless other arrangements are agreed to in the loan contract). Although this appraisal is intended to be a tool for the mortgage lender, it also benefits the homebuyer since it is never a good idea to overpay for a property.
Unfortunately, the appraisal is one of the last steps in a real estate transaction, well after the mortgage preapproval, offer, acceptance, and inspection. The entire sale rides on the appraisal. If an appraisal comes in too low, the buyer can get a second appraisal to try to convince the lender to fund the loan, but success is not guaranteed.
A homeowner can also order a home appraisal if they are thinking of selling their property (and many do this step before they even contact a real estate agent). This will give them an accurate picture of its market value. In that instance, the homeowner selects the real estate appraiser and pays for the service.
Real Estate Appraiser's Process
Since the function of an appraisal is to determine the current market value of a home, the primary tool of a home appraiser is an examination of the current local housing market. The appraiser reviews comparable properties that have recently sold in the area and factors in the differences between those homes and the house being appraised.
The appraiser reviews the overall condition of houses that recently sold, their size in square feet, and their features. They note the number of bedrooms and bathrooms in each. Generally, the more bedrooms and bathrooms, the more a house will be worth. They consider not just the original features of the home but also improvements that have been made to the property. Extras, such as a tennis court or air conditioning units, will up the value. The appraiser also looks to see whether a comparable sale property had any maintenance issues or repairs that needed to be considered by the buyers.
The appraiser notes all of this information, usually on the standard form. Most real estate appraisers use a standardized form known as the Uniform Residential Appraisal Report. The appraiser then compares the details of the recently sold homes to those of the home being appraised. They adjust the average sales price up or down depending on that comparison.
For example, if all of the recently sold homes had three bedrooms and two baths and the home being appraised has four bedrooms and three baths, its value will be higher than the average value of the recently sold homes. Other factors can impact price and are taken into account by a real estate appraiser. For example, circumstances such as a recent death or other tragic event on the property are likely to have a negative impact on an appraisal, and even a history of tobacco use in the home can lower its market value.
Appraisal vs. Home Inspection
When you are buying a home, there are many different steps required to determine its value and condition. The appraisal and the home inspection are both required since each serves a different purpose.
An appraisal is the primary manner of determining the current fair market value of the property. While the real estate appraiser takes the condition of the home into account, including maintenance and repairs required, the purpose of appraising is not to determine what works and what doesn't work in the dwelling.
A real estate appraiser will tour the home, generally doing a room by room walk-through to view and note the condition of the interior. They walk around the exterior to determine and note its condition; appraises the value of any amenities, like a swimming pool, fountain, or outbuildings; details any violations of health and safety codes; and records the layout of the property. Most of the appraisal calculation will depend on comparable sales, and this work will be done in his office.
A home inspection, however, focuses on the condition of the specific home. It is conducted by a different professional — a licensed home inspector. The inspector spends much more time in the property performing a comprehensive review of its physical condition. Part of this is a visual inspection, but another part involves testing whether major home systems are working. The inspection is intended to provide information to the homebuyer on what needs to be repaired or replaced in the home before or after closing.
Costs of an Appraisal
When you are taking out a home purchase mortgage, the loan agreement documents specify a set amount for the property appraisal. This must be paid by the borrower unless there is specific language to the contrary in the loan contract. Sometimes, a buyer pays the appraisal fee as part of the closing costs, and very occasionally, motivated sellers may agree to pay for the appraisal. The appraisal fee is set when the lender hires the appraiser and cannot be adjusted afterward.
A typical price range for a real estate appraisal runs from $300 to $600. The size of the property, its appraised value, and its location determine whether the appraisal falls in the upper or lower end of this range. This basically depends on how much time a real estate appraiser will need to spend on the appraisal and whether the property is residential or commercial. The typical real estate appraisal is not time-consuming. It usually only requires a few hours of the time of a real property appraiser to estimate the market value. The appraisal report is issued between three and seven business days later.