Home appraisals are something of a necessary evil in real estate. We need appraisals to confirm the value of a property before the lender will fund the buyer’s purchase, but if the home doesn’t appraise, it can lead to complications and even potentially lead to a deal falling apart.
Whether you’re buying or selling, here’s what you need to know about home appraisals.
What Exactly is a Home Appraisal?
A home appraisal is a professional valuation of a home by a licensed real estate appraiser; it tells you how much the home is worth based on market data.
If you (or your buyers) are getting a mortgage loan to purchase a home, the lender will order an appraisal once the home is under contract. The lender needs to know the market value of the property because they could end up owning the property through foreclosure if the buyer fails to make their mortgage payments.
But appraisals aren’t just for homebuyers. They’re also regularly used to confirm the current value of a home when a homeowner decides to refinance their mortgage.
What is Considered During an Appraisal?
Appraisals are a complex financial calculation based on recent sales of similar homes in the same general location. The idea is that sales prices indicate how much a buyer is willing to pay and how much a seller is willing to accept on the open market, and if a similar home located nearby recently sold for a certain price, your home will be worth about the same price.
When conducting an appraisal, appraisers typically look at factors like:
Date of the sale,
Property location,
Square footage and lot size,
Number of bedrooms and bathrooms,
Year built,
Quality of construction and condition of the home,
Views and amenities,
And literally any other factor that could materially affect the value of the home.
Despite extensive training to standardize the industry, home appraisals are somewhat subjective because different appraisers could prioritize different factors. Which is a more comparable sale: the house next door that sold over six months ago or the house a mile away that sold yesterday? The answer isn’t always clear. In a fast market, the recent sale is probably more comparable, but if the house one mile away is in a different zip code or school district, the home next door may be more comparable.
This is the art of appraisal. And it’s why two appraisers can calculate different values for the same home.
How Much Does an Appraisal Cost?
A home appraisal in California usually costs between $300 and $500. The fee is most often paid by whomever orders the appraisal. But if the appraisal is ordered by a lender, the lender will pass the fee along to the borrower.
Why Appraisals Can Cause Trouble
The lender won’t allow the buyer to borrow more than the home is worth. In fact, most lenders require that the house be worth far more than the loan amount, depending on the loan type and borrower’s credit history. Generally speaking, your down payment covers the difference between the purchase price and the loan amount. So as long as the appraisal says the home value is at least as much as your purchase price, there’s no problem!
But if the appraisal comes in below the purchase price, there could be a potential problem. In most cases, the lender will refuse to exceed their predetermined loan-to-value ratio (LTV). If the lender says they will loan 90% of the home’s value, the buyer needs to come up with the other 10%. So if the appraisal is lower than the purchase price, the buyer needs to either:
Come up with additional cash,
Convince the seller to reduce the purchase price,
Or, as a last resort, walk away from the deal.
If you’re in this situation, you might even want to get a second opinion from a different appraiser. Remember, different appraisers can arrive at different values for the same home. A second appraisal will cost you a new appraisal fee, but if the new appraisal comes in higher, you could save yourself a lot of trouble.
Having an experienced real estate agent in your corner is critical when navigating potential issues like appraisals. Agents at Sequoia Real Estate are trained in reviewing comparable sales to help determine property values, and they can help you decide if your appraisal is fair or if you need a second appraisal. Your agent can also help you understand which of your options can yield the best results under current market conditions.
If you have a question about appraisals, or you have questions about buying or selling a home in the Bay Area, contact Sequoia Real Estate to get honest answers from reliable experts.