Before approving your home loan, a lender must first ensure the property you want to purchase is appraised. The lender will also work towards achieving a professional assessment and an objective of the home’s actual market value before matching the price with a home loan. As a result, the lender will appoint an appraiser to determine its worth and its relation to other homes in the area.
How do appraisals work, and why do you need one
A home appraisal analyzes your property from a licensed or certified appraiser hired by the lender during the refinance or home purchase process. The lender has to get an accurate appraisal of the home since it provides a mortgage loan, and he/she wants to ensure the home is not giving too much money to the buyer.
The appraisal is also essential to the seller and buyer because if the home’s value ends up being lower than the agreed price, the buyer will be allowed to renegotiate the home price. An appraiser will evaluate the property and address any special requests from the lender when conducting research. The buyer incurs the costs of paying the appraiser.
Appraisal begins after both parties have agreed on a price and begin early to leave enough time to visit the home and produce a report. The lender looks for a home appraiser who consults with the seller to set a date and time for the visit. The appraiser will review the home’s interior and exterior to ensure its structural shape is okay and confirm no safety issues. The appraiser also looks at the number of risks and checks whether there have been significant upgrades since the last transaction.
Usually, the appraiser captures photos of various parts of the home. The appraiser conducts the appraisal personally, but at times, the homeowner might be present, especially if they are still living in the house. While it’s not common, buyers might request to show up during the process.
What are some factors that affect a home appraisal
Market
The state of the local housing market will impact your appraisal. By looking for similar homes in your neighborhood that are still active in the market or recently sold, you will know the expected price of other houses in the neighborhood. The information also helps in determining the depreciation and appreciation values of homes. After collecting this information, an appraiser will calculate the final appraised value of your home.
The appraiser will use Comparative Market Analysis (CMA) to compare your home to other homes that have been recently sold in the area. When comparing, the appraiser will look at the square footage, garage, number of rooms, type of house, and house size.
If after comparing the state of the housing market and the value falls below what the user wanted, the owner can use the factors used in comparing to increase the value. To boost value, homeowners should also increase the quality and make improvements inside the home. However, artificially increasing a buyer’s home value to secure a bank loan at the selling price is a crime in the United States.
Location
In real estate, location is a top spot. The value of a house in a shabby location will cost less than a similar house in a desirable area. Besides dictating a house’s value, a home’s location also dictates the period it will take to sell. During the appraisal, the neighborhood, together with the precise lot in the neighborhood, is considered. A home in a large area, for instance, will be of higher value compared to one in a hydro field or roadway even though they will be in the same area.
Square footage
To determine the home’s appraisal value, appraisers also assess the overall square footage of the home. After measuring all the livable spaces in the home to determine the total square footage and the number of stories, the appraiser will evaluate its value.
Age of the home
Many assume newer homes have a higher value compared to older homes. This is often true since newer homes have modern finishes that require less repair than older homes. However, there are perks associated with older homes that are unavailable with newer homes. For instance, it might be tough to find a new home located in an area with matured trees or historic areas. Anyway, the appraiser does not disregard the age of the home during the assessment.
Construction materials
The appraiser will factor in the type of materials used when building a home. If a home was built with modern and better quality finishes, it will be valued more highly than a home built with outdated and low-quality materials. In addition to keeping homes in a better condition, updating materials also increase the safety and efficiency levels of a home.
Bathroom and beds
Before adding a bathroom to your home, consult with a professional to ensure the upgrade will reward you with the appraised value. If your home has depreciated due to market or location values, you can break even by adding a brand new bathroom.
Your bedrooms, too, can increase your appraisal value. Current bedrooms have closets, and when owners start looking for houses to buy, they disregard bedrooms without closets. Instead, they refer to bedrooms without closets as “bonus” rooms.
Check the local ordinances and if you want to raise the appraisal value of your home, add a closet to your home. You can research low-cost options and get estimates within your budget from different people. Also, consult on the realistic forecasts of what effect the addition will have on your appraisal.
Temperature and appliances
The condition and age of electrical, ventilating, heating, air conditioning, and plumbing systems will be considered during the appraisal. Replacing older items is not always a recommendable option for someone wanting to sell their house. However, if you have a clean record of maintenance, warranty papers, and everything is working in order, the appraisal value might not change that much.
However, if anything is not functioning or is not working correctly, it could negatively affect the home’s value. Improvements like replaced supporting fixtures and new appliances can have a positive record. In the appraisal form, there is a section left for features that are energy efficient. It would, therefore, be worthwhile if you pointed out energy-saving equipment in your homes.
Low flow showerheads, appliances with the energy star rating, and water heater controls will make your home stand out in an area. Also, such equipment will appeal to home buyers who are ‘green’ or environmentally conscious.
How accurate are home appraisals, and how often do home appraisals come in low
Depending on the home appraiser, the appraisal may or may not be accurate. According to research, 45% of appraisals come in at a higher or exact contract price if the appraiser is not aware of the price agreed between the seller and buyer. However, in instances where the appraiser knows the agreed price, 93% of appraisals were found to be exact or slightly higher.
Low appraisals are rare. Out of the total appraisals, 92% of them are not affected by the mortgage loan since the value appraised is higher than or similar to the agreed price. The other 8% are lower than the contract price. This can increase the rate of interest in the buyer’s loan.
How to negotiate with a seller after low appraisal
After a low appraisal, the first thing to question yourself is why the appraisal is low. Was it the market value, the neighborhood, or other factors that led to the low appraisal? Before approaching the seller to negotiate, know your leverage and be informed. Share with the seller why you think the appraisal was low and suggest a solution to save the deal.
If the low appraisal was shifting markets, you should bring in the numbers to support the information and request the seller to lower the home price to reflect other market realities. You can even ask the appraiser to use CMA to support this.
You can also ask the seller what they can do for you. Even after agreeing to lower the sales price, keep evaluating more options. If a seller solely owns a home, they might be willing to finance the sale. If this occurs, you will be paying the seller and not the mortgage lender every month. If you choose to use this option, write an agreement and work with a licensed or certified lawyer in the real estate field to help you navigate the deal.
The Bottom Line
All the factors listed above have a role to play in the appraisal. If you are lucky enough and the appraisal fails in regard to the sale price, you will be a step away from acquiring a mortgage (read more). If it comes in lower than the contract price, you can negotiate with the seller requesting them to reconsider the price paying attention to the appraised amount. Or you can request another appraisal. You can also choose to come up with the additional amount needed to bridge the gap between the purchase price and the home loan amount or if these three are not viable options for you, walk away from the deal.
If you need any help or advice with the appraisal or loan process, don’t hesitate to reach out to us. (720) 352-7704, [email protected].