Appraisals are critical to the real estate market and the buying process. They provide a comprehensive evaluation of a property’s worth that considers the property’s condition, location, age, and the area’s market trends.
Whether you’re selling, buying, or refinancing a property, appraisals are essential for making informed decisions. Let’s learn the definition of appraisal, its types, how it affects real estate transactions, and more.
What is an appraisal?
An appraisal is an unbiased professional opinion of a property’s current market value. They are used for many purposes where a property’s worth must be determined, such as:
- Buying or selling property
- Determining property taxes
- Divorce settlements
- Refinancing
- Estate planning
- Obtaining a mortgage or loan
When buying or selling a home, an appraisal helps determine if the agreed-upon price is reasonable, given the property’s location, condition, and amenities. In refinancing, a property appraisal assures lenders that the amount they’re loaning doesn’t exceed the home’s actual worth.
A licensed appraiser is the only one who can conduct appraisals. They visit properties and evaluate their values based on different criteria. Their training, certifications, and expertise help them evaluate a property’s worth accurately.
Appraisers consider several aspects of a property in their appraisals, such as its location, physical characteristics, and current market conditions. They also review recent sales data of similar properties in the area to arrive at a fair market value for the property they’re evaluating.
Types of Appraisals
Appraisers use one or a combination of three main methods to determine a property’s value. They select a technique based on the specific needs and requirements of the property.
The three most common types of appraisals they use are:
Cost Approach
The cost approach method values a property based on the cost of building a new structure. In this method, the property’s value equals the price of the land, building construction, and the property’s depreciation. It then subtracts any loss in value due to depreciation.
The reasoning behind the cost approach method is that buyers shouldn’t have to pay more for a property than it would cost to build a new one.
The cost approach method gives the most accurate market value, making it particularly useful for newly built properties.
Sales Comparison Approach
The sales comparison approach is the most common method appraisers use. They will compare similar recently sold properties to the subject property to estimate its market value, adjusting the value based on feature differences.
Income Approach
The income approach calculates the value of a property by determining the income it generates, subtracting maintenance costs, and multiplying the net income by a factor of years. They are often used on income-producing properties.
Home Appraisal: Process and Costs
Lenders usually order home appraisals to protect their interests while the lender pays the fees. Depending on the property’s size, condition, and detailed requirements, these can range from several hundred to thousands of dollars. According to nerdwallet.com, appraisals cost 300$ to more than $1000.
Experts recommend hiring a qualified appraiser licensed or certified in the state and full of local expertise. They must also be impartial and without any involvement in the transaction.
Aside from looking at the recent sales of similar properties and current market trends in the area, appraisers also look at the property’s amenities to determine its value. These will include features like the number of bedrooms and bathrooms, the floor plan’s functionality, and square footage. They will also conduct a visual inspection of the property’s interiors and exteriors to note any conditions that may reduce the property’s value, such as needed repairs.
What happens after a property appraisal?
Once the appraisal is complete, it gets included with the loan documents and starts the closing process. It’s followed by mortgage underwriting, where the underwriter thoroughly examines the entire loan file to ensure everything is correct and all the necessary documents are there. They will also determine the risks associated with the loan and either approve or deny it based on the information submitted.
How does an appraisal affect real estate transactions?
Buying or Selling Properties
An appraisal helps determine a property’s fair market value, which is helpful in negotiating the purchasing price. Sellers may need to adjust their expectations if the appraisal is lower than the agreed-upon sale. Buyers may need additional funds to close the deal.
Obtaining A Mortgage or Loan
Lenders use appraisals to determine the loan amount since they want it to stay within the property’s worth. They may only approve a smaller loan if the appraisal is lower than the agreed-upon purchase price, impacting the buyer’s ability to close the deal.
Property Taxes
Local governments also use appraisals to determine a property’s assessed value, which they use to calculate property taxes. A higher appraisal than the previous assessment will lead to an increase in property taxes.
Home Appraisal Tips For Buyers
Planning ahead of the appraisal process helps avoid problems in purchasing the property. Here are some appraisal tips for buyers to remember:
Be careful in crafting your offer.
Carefully craft the offer you’re putting in. Research the local housing market and previous sales in the area to better understand selling price trends over the past few months. Begin with a more modest offer if the purchase price you’re considering is higher than the average price. You should also include an appraisal contingency.
Dispute an inaccurate appraisal.
Sometimes, appraisals are inaccurate. But you can dispute them. These can happen if the appraiser doesn’t see the property’s entirety or use comparable prices that are too far away.
Talk to your real estate agent if they have an explanation for the discrepancies; they may need to talk to your lender to get more information if they don’t. Your lender can then contact the appraiser to arrange a new appointment to reevaluate the property.
Be open-minded.
It may be difficult to accept when the value of the property you’re interested in is lower than expected. However, appraisals are there to protect you from spending too much. It’s best to move on and find a different home that better suits you. Keep an open mind; your dream home might be just around the corner.
Key Takeaway
An appraisal is a crucial part of any real estate transaction conducted by a licensed and certified appraiser. It provides a professional estimate of a property’s value to ensure a fair and accurate price for buyers and sellers.
The appraisal will determine if the purchase proceeds or falls through. Remember to be careful when crafting your offer. Dispute inaccurate appraisals and if the property’s value is lower than expected, keep an open mind and move on to the next property.
Your dream home is within reach.
If you’re yet to find a lender to partner with in buying your dream home, contact Cedar Home Loans. We offer the best home loans in Colorado that are flexible and will surely suit your needs. We also provide refinancing services that can help you manage your finances better.
With our local knowledge and expertise in the Colorado area, we’ll help you find the home of your dreams. Choose Cedar Home Loans today.
