You have reached another milestone. The home inspection is finally done and the repair negotiation between you and the seller has been finalize. What a relief. The next step is the appraisal.
Home Appraisal Cost?
The home appraisal cost is generally around $600-$800 dollars for regular 2-week delivery. The appraiser takes about one week to get to the property and another week to get the appraisal report back to the lender. A one-week rush delivery appraisal fee can be $850 or more. In a fast moving market contracts can be squeezed to 25 days closing some buyers will do a rush delivery.
What is A Home Appraisal?
“an appraisal is an act or process of developing an opinion of market value”.
The Difference Between a Home Appraisal and Home Inspection
It is good to know the difference between these two before concentrating on the home appraisal. Home appraisal has been defined earlier on. So, home inspection involves the reviewing of the house inside, outside or both. They both involve inspection but the main difference is that home appraisal concentrates on VALUE while home inspection concentrates on FUNCTION and SAFTEY but has nothing to do with the value.
In most cases, home/house inspection is conducted chiefly to identify the structure of the home or house. Its main purpose is health and safety. Hope this brings out the whole picture.
Why Do You Need an Appraisal?
- To help sellers determine the acceptable selling price and buyers decide on offering price
- Assist the underwriter in establishing value for a mortgage loan
If you are buying a home on an all-cash transaction basis, a home appraisal is carried to ascertain that the contract price of the property is in order, taking into consideration the features of the property and its fair market. In this scenario, a home appraisal is important to safeguard your monetary interests.
If the property you’re hoping to buy will be financed by a bank or any other lender, a home appraisal is a requirement to protect the lender’s investment in your property. It assures the lender that the mortgage they are giving you is not more than the value of the property, and should you not be able to repay the loan and a foreclosure is carried out, selling the property will grant the lender back their money. In this case, a home appraisal is what stands between the bank’s grant of the mortgage amount you asked for.
What Is the Appraisal Process?
1. Collect General Data
In this step, the appraisers collect general data on the market, specific data on the subject property, and the comparable properties in the area. The general data is information on the economic health of the area which is affecting the property you are purchasing. Are properties increasing in value, decreasing or stable? The specific data are details about the property being appraised and comparables that have been sold recently in the area.
2. Data Analysis
In the analysis of general data, the appraiser will look at the demand and supply of homes in the area. They might look at certain statistics to see if it’s a buyer’s or seller’s market or a stable market. In the analysis of specific data, the appraiser will collect a set of properties similar to the one you’re purchasing and look at the sold price and condition.
3. Determining Value
Appraiser have the approaches to value, cost, sales comparison, and income capitalization. If the he can’t find a recent sold that is similar to the home you are buying, the cost approach will be used. In this approach, he would calculated how much it would cost to construct a similar property.
The most common and widely used approach is the sales comparison, which is based on similar solds within an area. He will also make adjustment based on the differences of the home such as conditions, number of bedrooms, baths, and the condition of the home.
4. Report on Define Value
The appraiser will issue a report with the estimation of the value of the home you are purchasing and a copy will be sent to you lender for review.
What Does an Appraiser Look For?
1. House Examination
The house examination involves the appraiser making a trip to the home you intend to buy. He/she will view the house, take photographs of the features, and make prerequisite notes about the property. Most appraisers use Fannie Mae’s Uniform Residential Appraisal Report to conduct the house examination for single-family homes.
2. The Neighborhood
The characteristics of the neighborhood that an appraiser will pay attention to include neighborhood boundaries that separates a neighborhood that causes a change in value. The characteristics of a neighborhood and it can be the architectural styles and current land use. Also factors that affects value such as proximity of the property to employment and amenities, jobs and appeal to the market.
3. The Size of the Property
The size of the property encompasses, size of the lot, house, number of bedrooms and bathrooms, and the dimensions of all the rooms in the house.
4. Exterior of the Home
The basic components of a home’s exterior are the roof, the walls, and the foundation. The appraiser will take into great consideration the current state of these components. They will be looking to identify or rule out the presence of any defects and damages.
5. The Condition of the Home
All features and amenities present in the home will be critically evaluated by the appraiser, from the materials used for the doors and windows to the state of installed appliances. Expect the appraiser to walk in and out of every room in the house, taking note of the basic elements such as plumbing, flooring and electrical wiring.
6. Recent Renovations and Improvements
Is the property still in the form of its original construction or have renovations and improvements been made since then? The appraiser will take into account the nature and quality of any alterations made if any. Renovations, remodeling, and other home improvements positively impact a home’s value.
7. The Extras
What extra amenities make the home special? Does the property structure and system allow for room additions? Instead of a one-car garage, can the garage accommodate two or three? Does it have a swimming pool or not? Are there public utilities that the community can pay to use? The presence of such amenities adds value to the property.
Situations to Expect After an Appraisal
The ideal situation when buying a home is where the property appraises for either more or the same as the contract price. This allows your bank or lender to grant you the mortgage requested to continue with the closing process.
However, if the property appraises for the less than the contract price, then you can expect some delays in continuing with the closing process. For starters, the bank will reduce the mortgage loan proposed to match the appraisal cost. Why? Because it doesn’t make sense to pay the sale price of say $550,000 for a house appraised at $525,000.
What Next After a Low Appraisal
It is not uncommon for a property to appraise lower than its set sale price. If you find yourself in this situation, there are a few options that can still allow you to own the home you had your eye on. You can decide to:
a) Negotiate With the Seller
If both you, the buyer, and the seller are willing to find another middle ground to allow for the purchase of the house, then renegotiating the sale price is the way to go. Based on the new mortgage amount the bank is offering after the appraisal, you can agree on a new favorable contract price for the home.
b) Cover the Difference Yourself
The other option is to find a way to go around the difference in cost between the new mortgage amount and the contract price. If you have the finances, you can cover the difference upfront. If not, you can strike a deal with the seller that allows you to pay the difference either in installments or lump sum at a later date.
c) Dispute the Appraisal
If the seller is not willing to lower the sale price and you’re not ready to cover the difference yourself, the other card that you can play as a buyer is to dispute the appraisal. This action should, however, be taken with caution.
First, you’ll need to request a copy of the appraisal report. Once obtained, you should then seek counsel from both the seller and agent to confirm that it is inaccurate. Point out the specific factors that you are disputing, such as the lack of including specific improvements, remodels, or upgrades made on the home or irrelevant comparable sales used.
It is important to be smart and respectful of other parties when arguing your case of an inaccurate appraisal and challenging the appraiser’s findings. Also, note that the costs of a second appraisal still fall on you as the home buyer.
d) Walk Away From the Deal
If your sale contact contained loan contingencies such as your qualifying of a loan to continue with the closing process, then you are free to walk away from the deal. This is because a low appraisal means you can’t qualify for a loan amount that will facilitate the purchase of the property. Therefore, the seller is expected to release from the contract as well as your earnest money deposit.
Appraisal Came in Lower Than Price
In a hot market, buyers get into multiple offers situations and bid up to the price, the comparables that sold in the last 3 months doesn’t support the estimated price. The lender will not issue the loan if the appraisal is less than the offer price. Make sure you are protected by the low appraisal contingency if possible.
What if the Appraisal is Higher than Offer?
The appraisal report estimates that your home’s value is ten or twenty thousand dollars more than the offer price on the Purchase and Sale Agreement. As a buyer you should celebrate because you’ve just built some instant equity in your new home!