Every real estate property that is in the market to be sold has a specific price at which for which it is to be sold. Often, it is observed that houses in the same neighbourhood may not be sold at the same price. A home appraisal is important as it tells the people (home owner, real estate agent, builder, buyer etc.) about the potential capital value of the property. Appraisals are necessary while buying or selling property because banks may not lend money if the appraisal value of the house is lesser than the loan amount.
[lwptoc numerationSuffix=”dot” title=”Table of Contents” width=”full” titleFontSize=”16px” itemsFontSize=”16px” colorScheme=”light”]
What is an appraisal?
An appraisal is a valuation of the property (real estate property) which is done to determine the best possible selling price of the property. An appraisal is essential as it helps the buyers and sellers the potential worth of the property in terms of capital.
Why is an appraisal required?
An appraisal is needed to determine the exact capital value of the property. The value of a real estate property is not the same as that of another similar property which was sold in the neighborhood. There are other factors that help to determine the cost at which the property is sold. The quality of structures and fittings that are there in the property and the maintenance that is done over the property are important factors that are considered while appraising the property. A home appraisal is done so that the buyer does not overpay for the real estate property.
List the use cases
Since an appraisal is an independent unbiased opinion on the value of a property, there are various instances in which it can be conducted. It is conducted by a certified or licensed real estate expert, and the appraisal is based on the inspection of the property and the comparable sales that have occurred in the neighborhood. An appraisal of the property can be done,
- Before selling the property
- Refinancing the property – replacing the existing mortgage over the property with a new mortgage due to the change in the value of the property after purchasing it.
- While obtaining other loans
Importance of a proper appraisal
It is very important that the appraisal of the property is done before buying it. This is because, at the time of looking at the property for the first time, many people are impressed by the initial layout of the property and may pay an inflated price for the real estate property. A home appraisal will help to determine the actual value of the property and can be used by the buyer to further negotiate the cost of the real estate property with the seller or the real estate agent. The appraisal report also gives the current worth of the property and the returns that can be expected by the investment in the property.
What should you do during an appraisal?
The following have to be given to the real estate expert during the appraisal of the property –
- Provide annual tax bills
- Furnish the plan of the property
- Provide details of the work that was done on the property such as changing electrical wires and other plumbing work along with the bills.
- Give the latest update on the pest control done and its report
- Ensure that the surveyor can reach all parts of the property such as the loft and other unused areas
- Fix the property for leaking taps and clean the property to ensure the absence of cobwebs in the property.
Whom to approach for an appraisal?
A real estate expert who has a valid license will be able to appraise the real estate property and determine the true value of the property. It is a third-party opinion that is provided to the buyer/seller. Insurance companies, banks, government agencies, tax authorities, courts look for the latest appraisal reports during claims and for other purposes.
What happens if a home doesn’t appraise for the sale price?
If the appraised value of the property is less than the sale price, the lenders will use that amount to calculate the loan to the average amount of the mortgaged property. Unless the seller agrees to lower the selling price of the property, it will result in the buyer having to increase the down payment amount in order to get the same mortgage and interest rate over the property.
If the property does not appraise for the selling price, both the seller and the buyer will have to make some decisions. These decisions will result in the deal moving forward, or failing. The buyer could pay the difference between the appraisal amount and the selling price of the property. In a rapidly appreciating market, a buyer may do this. The other thing that can be done is that the seller reduces the selling price of the property to match the appraisal amount of the property. This usually happens when the sellers are highly motivated to sell the property.
A seller can also get another appraisal done in order to appeal the first appraisal. The main reason for conducting an appraisal is to prevent investment into an overpriced asset (property). A second appraisal will only be allowed if it can be proved inconclusively that the first appraisal was very low.
Does the seller have the right to see the appraisal?
Sellers often do not get a copy of the appraisal, but they can request a copy of the same. It is important that sellers are allowed to check the appraisal, as an unexpected price drop days before a settlement could be disastrous.
What happens if your house is appraised for less than the selling price?
When the property is appraised for less than the selling price, it can affect the mortgage, and subsequently, affect the contract. The low appraisal may be due to several reasons. One of the possible reasons may be that the real estate agent may have listed the property higher than what it actually is. In such a scenario, the seller can reduce the asking price for the sale of the property.
When the property appraises for less than its purchase price, the following outcomes are possible –
- Seller and buyer renegotiate a new and lower sale price for the property.
- The buyer would have to increase the down payment to meet the new loan to value the amount of the property and down payment minimums.
- There may be a cancellation of the contract that exists between the buyer and the seller.
- The seller can wait until a comparable property sells at a similar asking price.
- Requesting the buyer to make up the difference in case
- Lowering the sale price of the property in order to meet the appraised value of the property.
- Relist the property on the market at a later date.
- Requesting for an appraisal rebuttal, i.e., asking for an appeal in the appraisal.
Do houses usually appraise for selling price?
There is a good chance that a property will usually appraise for its selling price. An appraisal is actually an ‘estimate’ of the property value. It is required in real estate transactions in which finances are involved, as it assures the lender that the buyer’s investment is worth the money. It is to be noted that appraisers do not evaluate the property based on its décor, but rather they follow a strict set of guidelines. The following can be done to ensure that the property is appraised for the selling price –
Ensuring that the appraiser is highly qualified and familiar with the area –
This will ensure that a competent appraiser is in charge of your property, and knows the surrounding area. If a new appraiser who is not aware about the neighbourhood appraisers the property, there is a high possibility that the appraisal will be low.
Providing the appraiser with access to maintenance records of the property –
Having the required receipts and paperwork for other renovations will help the appraiser adjust the values accordingly.
Keeping the property ready –
Appraisal generally consists of examining the condition of the property and structure. However, having a property which is in a showing condition will enable the appraiser to see the property in the best light. Decluttering the property, getting it painted, etc. will ensure that the appraiser witnesses the property at its best.
Should you ever pay more than the appraised value for a home?
An appraisal is an ‘estimate’ of property value. It is part factual, substantiated by evidence, and part personal opinion. There are circumstances where the selling price of the property and the appraisal amount differ from each other. In such a situation, the buyer can request the seller to reduce the sale price in order to meet the appraised amount. Often, sellers do not agree to do so, and it is the option of the buyer to either pay the sale price for the property or walk away from the deal.
At times, there are some properties where the appraisal value does not measure the intrinsic value. These properties cannot be compared to any other property, due to their unique characteristics. They possess features that have additional value to the potential buyer. There can be several factors that justify the payment for a property which is above the appraised price. The deciding factor ultimately lies with the buyer and whether they are interested in obtaining the property.
Can a seller back out if the appraisal is low?
A low appraisal is an unfortunate event while selling a house, both for the buyer and the seller.
If a seller is sure that the appraisal of the property is lower than the expected amount and the buyer is not willing to challenge the appraisal, the seller would have to cancel the contract to sell the property. In such a situation, the seller can back out if the appraisal amount is low. The seller can choose the option of waiting for a new buyer once the market conditions improve.
If it is of utmost importance that the property is sold by the seller, the seller can contact the other potential buyers who were interested and have them consider to pay the difference in the amount.