Home appraisal: Importance, process, and strategic use

Whether you’re in the market to buy a new property or refinance a current mortgage, an important part of the process will be getting an appraisal for that property — and for good reason, before you can make any significant and meaningful financial decisions you have to know how much the property is worth.

The appraisal process can be stressful and difficult to navigate, especially if it’s your first time being involved with an appraisal. Sometimes it’s not always so clear what factors might have an impact on a home’s appraised value, so we want to help demystify the process.

It’s also important to note that it’s not only you and the appraiser that might be involved in the appraisal process, as a seller and or a lender could potentially be involved, as well, and everyone will have their own vested interest in the property’s appraised value.

What is an appraisal?

A home appraisal is a key part to any loan-closing checklist, and is the process by which a property gets evaluated for its fair market value. It is generally done by a third-party appraisal company and is often required when securing a new mortgage or refinancing an existing mortgage. Home appraisals are also used by local governments in determining property taxes.Even in situations where a mortgage isn’t being used, local governments might require an appraisal in order to help determine property taxes.

The appraisal normally occurs after a potential buyer puts down an offer on a property. Before the seller can accept the offer, the property must be appraised to ensure that the offer is within acceptable range of the property’s fair-market-value.

Why is an appraisal needed for a buyer-seller transaction?

There are several reasons why an appraisal is important for the buyer, the seller, and the lender — and in the case of a refinance, it is important for the current homeowner.

In a buyer-seller transaction, the buyer and seller will have competing interests when it comes to the property appraisal. A buyer might try to get a property appraised before closing on their offer just to make sure that the value of the property is within the ballpark of the asking price that the seller has placed on the property. Obviously for the seller, the higher the appraised value of their property the better it is for them as it will only help them get the best price possible when closing on the sale of their estate.

If the buyer is taking out a mortgage to help pay for the house, an appraisal that comes in much lower than the asking price can have mixed results — on the one hand it can provide leverage to the buyer to negotiate a lower purchase price of the home, but on the other hand it might impact the amount of money their lender is willing to let them borrow.

For lenders, an appraisal is of utmost importance. When a buyer is using a mortgage to help cover the cost of a property, it is usually the lender who will request the appraisal. In the case that a borrower defaults on his payments and the lender assumes control of the property, banks or lenders want to make sure that the property will cover the cost of the loan. Most lenders also factor in the value of the property when determining how much money they are willing to lend — this is called loan-to-value, or LTV. For example, if a lender will give a loan of up to 80% of the value of the property, and a borrower is looking to purchase a property for $500,000, they might be approved for a $400,000 mortgage. However, if the appraised value of the property comes in lower than that, say at $450,000, a lender might only approve a mortgage of $360,000.

Why is an appraisal needed for a refinance?

An appraisal is required when seeking a conventional mortgage refinance as well. Much like in the case of a mortgage for purchase, lenders will require an appraisal for a refinance to make sure that they have an accurate idea of the fair market value of a property before creating and approving a whole new loan for the property

For the current property owner, an appraisal could be extremely beneficial, especially in the case of a cash-out refinance. If the property they are refinancing has significantly increased in value since the initial acquisition, this could help the homeowner get much better terms and rates on the new mortgage. In terms of a cash-out refinance, a spike in a property’s value can help the homeowner take advantage of the increased equity in their house and utilize this increased equity in the form of cash.

The appraisal process

Though a messy house isn’t the best look for a house when getting appraised, it generally shouldn’t impact the fair market value of the property. Instead, most appraisers consider the following things when trying to assess the value of a property, including: the geographical location, size of the estate, square footage of the building, number of bedrooms, curb appeal, recent upgrades to the property, and the recent purchase prices of similar properties in the neighborhood.

— Lastly, it is important to remember that your property is not assessed in a vacuum. In general, an appraiser will try to understand all the different elements of a property in order for them to find comparable properties. The recent purchase prices of these comparable properties will form the basis of the valuation for the appraiser, giving them context for what the building might be valued on the market.

After the appraiser completes their market research, they create a final valuation of the property and deliver the report to the mortgage lender or whoever commissioned the report.

How much does an appraisal cost and who covers the cost?

Though every appraisal company is slightly different and prices might vary, most appraisals cost between $300 - $1,000. cost of the appraisal will depend on the size, type, and location of the property.

In most cases, the buyer covers the cost of the appraisal. Even though the mortgage lender is usually the party commissioning the appraisal, the buyer is usually the one paying for the appraisal. The mortgage lender usually includes the cost of the appraisal in the closing costs.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.