The seller of that home you are about to purchase no doubt thought long and hard about how much to ask for it. She consulted with her real estate agent who spent time pouring over statistics and prices of recently sold comparable homes in the area to come up with a good estimation of the home’s value.
You made your offer based on what you felt the home was worth (hopefully based on your agent’s research). When all is said and done, however, your and the sellers opinion of value may take a back seat to another person. And sadly, that persons opinion may dictate the final terms of the deal. For the lender, the home is worth what the appraiser says it’s worth.
Who is the appraiser?
A professional appraiser is an unbiased third party that is trained to determine the value of real property (real estate). While not all appraisers are state-licensed, federally regulated lenders are required to use only state-licensed appraisers. Like all REALTORS®, most appraisers belong to a national association that adheres to a strict code of ethics. But unlike REALTORS®, appraisers in Colorado require a 4-year college degree.
But are appraisers always accurate in their evaluation of homes? Usually they are, but not always. And it depends on the information available to them at the time.
What affects a home appraisal?
Numerous factors can influence a home’s appraised value. Some of these include:
- The national and local economies
- The location of the home
- Nearby foreclosures
- The condition of the home
- The value of other, similar homes that were recently sold in the area
- The appearance of the home compared to those that have recently sold
- Upgrades made to the home.
A day in the life of an appraisal
Let’s assume you’ve made a full-price offer on a house that is listed at $300,000. The lender will order an appraisal of the house before giving you the final decision on your loan application.
The appraiser visits the home and looks at every aspect of its exterior, from the roof to the soil. Then, she inspects the interior, from the ceiling to the floors.
Back at her office, the appraiser uses the information she compiled to compare it against comparable sales nearby. So what does comparable mean? The appraiser is trying to find homes in the same neighborhood (if possible), same style (ranch vs. 2-story), and size … with equivalent amenities, upgrades, and even equivalent views. Once the appraiser finds the sold homes that are most like the subject (your property), she will apply adjustments to the comparably sold homes to account for features that the “comp” has that your home may not have … or vice versa.
“The best indication of value is a sold comparable property.” Getting to the right comparables and adjusting them correctly is the most challenging aspect of the appraisers job.
The best news a buyer can receive is that the house appraised above asking price with no conditions. The next best news, for both buyer and seller, is that it appraised at the offered price.
Then, there’s the bad news
The Buyer and Seller typically have four choices when an appraisal comes in under the agreed-upon sale price: 1) agree that the seller will lower the sales price to the appraised value, 2) agree that the Buyer increase the cash down payment to make up the shortfall between appraised value and asking price, 3) agree to meet somewhere in the middle, 4) or walk away from the deal. The parties may also dispute the appraisal … for a VA appraisal this is called “tidewater.”
If you feel the appraisal was too low, work with your agent to find discrepancies in the report. Check that it accurately reflects the square footage, the age of the home and the number of bathrooms and bedrooms. Check the comps the appraiser used for errors regarding the home’s condition. The listing agent should provide the comparable properties he used to arrive at the listing price and a feature sheet to highlight the property upgrades. In addition, it’s a good idea for the listing agent to meet appraiser at the property and be available during the appraisal to answer any questions. Some appraisers won’t look at agent provided comps. But most will and appreciate the information.
If you find errors, have your real estate agent contact the lender for a new appraisal. Most experienced real estate listing agents come close to the figure that the appraiser arrives at. But the agent does not set the listing price for the home, it’s the seller.
About the author: The above post “The Appraisal: What You Need to Know When You Buy a Home” was written by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page.
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