One of the most confusing aspects of obtaining a home can be the appraisal process.
Most people think when you buy a house that the selling price is the value of the home. The truth is, the value of the home is primarily based on other properties that have already SOLD in the same market area.
A real estate appraisal is the process of assigning an objective value for a home.
The buyer is free to pay whatever they like for the home. If the buyer intends on getting a mortgage, then they are required to get some type of home appraisal. The opinion of value (the appraisal) is based on properties (comparable properties) that have sold in the past.
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Appraisals are an important part of the home buying process. A real estate appraisal establishes a property’s market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages.
It is properties with characteristics that are similar to a subject property. The appraiser is looking for similar square footage, floor plan, the number of rooms, type of rooms and location to name a few. The best comparable could be the home next door or a few miles away. The best Comparable would be the house next door with the same floor plan, upgrades, view, everything exactly the same as the subject property that closed the day before the appraisal assignment.
When the home next door is not available the appraiser will attempt to find homes as close as possible and make adjustments. The adjustments are added or subtracted from the comparable property in an attempt to equal the subject being appraised. If one comparable did not have a 2 car garage like the subject. The appraiser would add the approximate value of the garage to the comparable to bring it up to the subject. If the comparable had a 3 car garage the appraiser would subtract from the subject the value of the extra garage.
Appraisals must be conducted by a licensed, third-party appraiser who has no connection to the buyer, seller or lender. That way, all parties can be sure the determined market value is fair, unbiased and free of any influence from any party that could benefit.
The lender usually orders the appraisal, but the borrower is the one who usually pays for it. The appraisal fee is an upfront, out-of-pocket expense that will not be refunded if either party fails to move forward with the sale.
Appraisers look inside and outside your house. They look at the neighborhood, too.
Externally, here’s what they look for:
Internally, they look at things like: