If you’re buying a new home (and sometimes if you’re refinancing too!) you will need to have your house appraised. Whether you’re new to home buying or you’ve been through the process before, it’s important to understand what an appraisal is and how it can affect your transaction.
What is the appraisal process?
An appraisal is the process of determining the fair market value of a home. It’s a way to make sure that the home is worth what you’re paying for it, which benefits both the homeowner and the mortgage lender.
A third-party, independent appraiser will assess the value of the home by reviewing the home’s condition, potential improvements that have been made to the home, and recent nearby home sales. The appraiser takes all of that information and determines an estimated value for the home. A copy of the appraiser’s determination will be given to you and your mortgage lender.
What if a home appraisal comes in lower than the contract price?
Many real estate agents suggest that their clients include an appraisal contingency in their real estate contract, which essentially means that the buyer can walk away from the deal if the appraisal comes in too low. Talk to your real estate agent about this before you make an offer - your agent can offer guidance on how to include this in the contract.
If you have an appraisal contingency and the appraisal comes in low, you’ll have to follow what’s written in your contract. If you don’t have an appraisal contingency, it could be more difficult to abandon the transaction without leaving escrow money and other funds on the table. It all depends on how your deal is structured, so have a conversation with your agent early in the process so you’ll know how to handle this situation if it happens.
Your contract may also include an appraisal gap clause - I have a blog explaining that topic here.
What’s the difference between an appraisal and an inspection?
These are two important pieces of any real estate transaction, but they are very different. An appraisal determines the home’s estimated value without performing an in-depth inspection of things like HVAC systems, appliances, etc., while an inspection looks for potential issues in the home. With a home inspection, an inspector identifies anything in the home that may need to be repaired.
Can you appeal a home appraisal?
If you don’t agree with the appraiser’s determined value of the home, you can appeal it, but you’ll need quite a bit of backup information. Your real estate agent is your best advocate in this situation, and they can help you find the information you need in order to appeal.
One of the most popular reasons that people appeal an appraisal is on the grounds that the appraiser used outdated comparable home sales (or “comps”). You can review the comps the appraiser used, and if you feel they don’t accurately relate to your house or they weren’t sold recently. You could also look into appealing if the appraiser didn’t properly account for home improvements.
Thinking about buying or selling? Let’s chat! Get in touch with me at 8z Real Estate to talk about your goals.