As the housing market appears dim due to rising rates and decreased affordability, being able…
Whether you are in the process of selling your home or journeying through the mortgage process as a buyer, you will come across a crucial step that decides the true value of the home you’re buying, the appraisal.
Think back to the early stages of home buying. When looking around for homes, you will see that each property will have a different listing price, despite being in the same area or having similar features. Just because a realtor lists a house at a certain selling price does not mean its true worth equals that dollar amount. An appraisal is when a home’s value is rightfully determined.
An appraisal, also known as a property valuation, is the process of determining an opinion of value for a property. Homebuying transactions typically require appraisals because every property is unique and change infrequently, ultimately adjusting the property’s value at an unpredictable rate.
How Do Home Appraisals Work?
For buyers, an appraisal is typically required for your mortgage to close. It’s important for buyers to know everything happening regarding your home, so how do home appraisals work? In some cases, an appraisal waiver may be issued which eliminates the appraisal requirement and prevents possible delays should the appraisal report reflect a different value than the agreed upon the purchase price or estimated value. If an appraisal waiver is received this means that the estimated value or purchase price has been accepted, your lender will let you know if you have the option to skip the in-person appraisal. If you are, however, interested in moving forward with an appraisal, you might not know how this works or if you can trust the process. How do you know that those in charge of executing an appraisal can be trusted with such a daunting and important task? We can give you some peace of mind by introducing appraisers.
Appraisers are the ones behind the scenes of an appraisal. By leveraging their professionalism and expertise, they strive to achieve their primary goal, fairly determining property values with accuracy, fairness, and equity.
Appraisers will reference the selling price during a purchase transaction however their responsibilities strictly focus on the data. By doing their due diligence through research and inspections, they can determine a value that may be higher, lower, or relatively similar to the price in the contract. How far off or similar the final value is to the price depends on several factors that appraisers take into account.
What Do Appraisers Look At?
Just like humans, each home is unique. Look at the houses next to you and in the same area, would you say they’re the same? If you live in a planned community, then at first glance, maybe they are similar. Truth is, it does not matter. There will always be something that differentiates multiple properties when compared against each other. Question is, what exactly do appraisers look at to determine their home value?
The area or location of the house is one of the most crucial external factors that appraisers consider when determining the home’s value. Not only will appraisers examine the neighborhood it’s in and other nearby neighborhoods, but they will also assess the home’s proximity to good schools, hospitals, fire stations, police stations, and other valuable services in the area.
Whether commute is an issue for homeowners or not, proximity to community services signals a nice living area. The reason that appraisers look at proximity to these services is because of the value they bring to the community. Health care, education, and emergency response services bring safety and value to the residents living near them, allowing them to have a higher advantage than homes that live farther away.
Similar Homes (External)
In addition to the area a house resides in, appraisers also assess similar homes in the same or nearby area. Two considerations that a nearby property must meet to compare to the house in question are:
- How long it’s been off the market, and
- Its features, whether it be technical or in appearance.
The homes deemed worthy to be used as a comparison are called comparables, or comps.
Appraisers typically look for at least two to three comps sold within the last 90 days. If there are not enough properties for comparison, they may expand it to 120 days. You may be wondering, why would an appraiser need to look at other sold properties to determine the value of one not officially off the market? Two words, market value. The sale prices of these recently sold homes provide insight into the state of the real estate market in that specific area, representing the latest trends that may or may not have affected house prices. Are prices in the housing market rising? Falling? Stable? These are the questions that appraisers need to ask to give a fair and appropriate appraisal of the home.
Regarding technical and physical features, these would have to be fairly common among the subject property and the comps for the appraiser to consider. Fairness would be out of the question if a house with noticeable wear and tear compares to a newly built house with very little to no issues. Remember that appraisers do their best to ensure equity and fairness, constantly comparing the smallest of details when necessary.
Property Details (Internal)
After an appraiser runs through the external factors in determining the value of a home, do you think it’s enough to release the appraisal? Not yet! Even though external factors contributed a great weight to the appraiser’s final determination, there is still extensive research on the appraiser’s part to determine the value. Property details are one of them.
Property details are like the details of ourselves; they are characteristics and traits that separate us from each other and make us unique. We have age, size, physical features, and maybe even different fashion styles. Property details include age, size, square footage, appearance, and features all-around. Why do these matter when coming up with an appraisal value?
Obviously, the bigger and nicer the house, the higher its value. Property details matter because they tell appraisers if a property is new, if it has more bedrooms and bathrooms, if it accommodates a lot of space, and if it looks refreshed.
Added renovations or remodels added by the original owner, like an extra bathroom, basement, or pool, are likely contributing to the home’s appraised value. Even though it wasn’t the buyer who decided on these changes, they would still be potentially living with those newly implemented features.
Appraisers will typically set up an appointment to inspect the house, not to be confused with a typical inspection by a home inspector. While inspectors focus on the condition and functionality of a home’s features, appraisers evaluate them regarding their state, appearance, and added value to the entire home. Interior and exterior features are critical factors in determining a home’s appraised value because a lot can change in the span of how many ever years the previous owner has lived there.
Let’s look at a few examples of house features that can cause its value to change:
- New pool – Higher
- Renovated flooring – Higher
- Low paint quality – Lower
- Uncut and overgrown greenery – Lower
- Poorly conditioned yard – Lower
- Remodeled bathrooms – Higher
You get the idea! Think of it as the home is competing for the best home in the neighborhood. If your home is in amazing shape and has a strong visual appeal, its value is likely to be high. If the home is in decent shape with just a few redeeming qualities, you can expect its value to be lower.
Value is in the Eyes of the Appraiser
There you have it! The fate of a home’s value rests in the hands of the appraiser. If you were hesitant about an upcoming appraisal, we hope this blog relieved any stress going into the process.
Though appraisals may be required to obtain a mortgage, it will give you peace of mind to know if you’re getting a fair asking price for a potential property. Remember that an appraiser’s mission is to ensure fairness and equity with utmost accuracy. If there is anyone skilled enough to determine the final value of your next home, you can trust the appraiser to get the job done.
After an appraisal is ordered, the next step is underwriting, just a few steps away from closing! In the meantime, check out our guide on closing costs and learn what each fee entails. Feel free to contact us if you have any additional questions on the mortgage process.