What if I told you that an appraisal’s primary function is to protect lenders? They are taking out an insurance policy on the buyer. While there are other uses for an appraisal, they’re often misunderstood.
As a seller, it’s important to know if you need one before putting a house on the market. As a buyer, maybe you’re checking on the house’s worth. First, you need to know what they are, who administers them, and if you should get one in the first place.
So, what is a home appraisal? Let’s dive in.
What Is an Appraisal?
Before we take a look under the hood, it’s essential to understand the definition. In the real estate industry, an appraisal is an unbiased opinion conducted by a licensed professional to determine a property’s value.
What Qualifications Should an Appraiser Have?
Appraisers undergo a rigorous education program consisting of four different levels of appraisal licensing, some of which vary, depending on your state:
- Trainee Appraiser
- Licensed Residential Appraiser
- Certified Residential Appraiser
- Certified General Appraiser
Appraisers will likely need to be licensed, residential appraisers. This qualification—depending on the state—combines over 1,100 hours of real experience with mandatory testing. In addition to these requirements, each license is acquired through a state’s appraisal licensing board.
How Do Appraisers Calculate the Value of a Home?
When hired, usually on the lending bank’s behalf, appraisers conduct a wide range of checks to give an opinion on value. There are many components to value, so they research market trends before entering a house. When they arrive, there will be five main areas under their microscope:
Exterior of the Home
An appraiser will look into the structural soundness and features of the home exterior. These include the roof, foundation, driveway, and many other areas. They’ll analyze health and safety conditions to ensure nothing will harm the new homeowner.
Size of the Home
The appraiser will verify the total square footage of the house. This number occasionally changes due to outdated records and new renovations.
Interior of the Home
The interior of a house includes flooring, walls, plumbing, electrical, kitchen, bathrooms, and many other categories. Appraisers will make sure each area is functional, safe, and well-maintained.
Home Improvements
These are key components that add resale value. When appraisers conduct their search, they’ve already compiled a list of comparable houses. Using this data, appraisers can place a price tag on your home before walking through the front door. Home improvements could change the appraisal value. Common upgrades homeowners make include flooring enhancements, bathroom updates, and kitchen remodels.
Features and Amenities
Amenities that set your home apart from the other 50 homes on the block will increase the overall value. If you have a pool, sauna, BBQ pit, or interior elevators, it could significantly boost your house’s appraisal.
Should I Get a Home Appraisal?
When you’re deciding on a home appraisal, consider your goals. The average person won’t need to arrange one. Although, in some cases, it’s justified.
If You’re Selling Your Home
Sellers might think they need an appraisal to understand what their property is worth. In actuality, Realtors will do the heavy lifting with a comparative market analysis (CMA). These are similar to the appraisal process and take the value of comparable homes in the area to determine a listing price. Using a trusted real estate advisor will guide sellers in the right direction to avoid costly appraisals.
If You’re Using Financial Assistance to Buy or Refinance a House
When buyers enlist the help of a lender, they’ll require an appraisal before a loan is approved. The bank wants to understand the worth of a property using a non-interested party. If a buyer happens to default—not paying the agreed amount on time—the lender can seize the property. In these cases, lenders would resell to cover the cost of the loan. Hiring an appraiser is in their best interest to hedge losses.
If You’re Paying Cash
The purchasing power of an all-cash offer can negate the need for an appraisal. However, it’s advisable to enlist the help of a professional. When a bank uses a third party to protect its investment, it’s a good idea to follow suit. The $500 price tag to hire another set of eyes will undoubtedly be prudent.
How Can I Get a Higher Appraisal?
Once a verdict is reached, it’s understandable some are not happy with the appraiser’s opinion. However, there are plenty of ways to increase the value of a house.
Homeowners can make interior and exterior repairs, conduct home improvement projects, and even add amenities. Study the appraisal report and focus on finding cost-effective solutions to noted problems.
Generally, lenders will side with the outcome of an appraisal. However, there are ways to appeal the decision and get a second opinion. Use a copy of the appraisal paperwork, and address valuation issues. If the bank rules in your favor, another appraiser will take a look.
The Bottom Line
An appraisal will objectively tell you what a property is worth. It’s important to understand that appraisals are opinions and not a final value. Market conditions and varied opinions could sway the price in an appraisal in either direction.
When licensed professionals conduct an inspection, they tend to examine comparable houses along with the five main components of a home. There’s nothing wrong with getting a second opinion on an appraisal, but in most circumstances, the lender will make the final decision.
Appraisals are useful tools in buying, selling, and refinancing a house. Lenders often use them to get an opinion of value before shelling out money. Knowing what they are and how they work is a crucial part of the real estate process and can help you make informed decisions.
