If you are in the process of buying a home for the first time, you probably have a lot of questions. You should turn to your realtor to get more specific ones answered, but there are plenty of other sources for information. When you buy your first home it can be daunting to even start looking at homes. But don’t let yourself get overwhelmed. Instead, start understanding the process one step at a time.
One step in the home buying process is the appraisal. The appraisal normally takes place after the loan application, and before the sale is finalized. In order to understand how appraisals really work, you have to look at what an appraisal is, what are the steps, why you need one, who pays for them, what are common methods used by appraisers, and what does the report include.
What Is an Appraisal?
A home appraisal is a process used to estimate the value of a property. This process helps you figure out if the asking price is actually the price that you should pay for the home that you are looking at. The appraisal is an opinion of value that is completed by a professional.
An appraiser takes into account multiple factors of the home including, but not necessarily limited to:
- Recent Sales
It’s important to realize that an appraisal and an inspection are completely different processes. If you are buying a home, you should make sure to get the house inspected before the finalization of the home purchase.
What Are the Steps of an Appraisal?
A home or property appraisal can vary depending on the state, but most of them follow a similar timeline.
- First, there is the examination of the property. This is where the professional appraiser comes to the property and looks at the different factors that affect the appraisal of the home.
- Next, the appraiser takes time to research comparable houses in the area and look at recent sales to help determine the market value.
- Finally, there is an appraisal report written. The professional uses the information they gathered from both the inspection and the comparable homes to give you a final report.
The appraisal steps all lead you toward finding out the market value of the home you are trying to sell or buy.
Why Should you Get an Appraisal?
An appraisal informs all parties of the market value of the home, including the lender. One advantage is that it can help ensure that you do not overpay for a home. Some home loans are contingent on getting an appraisal that puts the home’s value near the agreed upon price. Appraisals can also be done when you are trying to get a second mortgage on your house or for insurance reasons.
Who Pays for an Appraisal?
One major question associated with home appraisals is who pays for them. It is important to know that these types of things depend on the situation. Some sellers will agree to pay this price, but often it is the buyer who has to pay for an appraisal. When the payment is made also depends on the situation.
The exact cost of an appraisal depends on a few factors. Of course, each appraiser may have different billing processes that cause the prices to fluctuate, but normally the price is similar from appraiser to appraiser. Other factors that affect the price of an appraisal are the size of the property, the location, and the estimated value. The fee will likely be a few hundred dollars or more.
What Are Common Methods Used By Appraisers?
Appraisers follow a standard approach to appraising a home, but there two basic ways that appraisals take place. First is the sales comparison approach. This common approach looks at the house itself and then looks at comparable houses that recently sold in the same market. This approach is commonly used for existing houses.
New houses are sometimes appraised using what is called the cost approach. This approach looks at reproduction costs rather than comparable houses that were recently sold. The appraiser will figure out how much it would cost to replace the structure of the property, and then they will also consider the value of the land.
Both of these approaches can be used to estimate the value of the home, and each one ends in a report.
What Does the Report Include?
Generally speaking, one appraisal report is going to include similar information to another. The information commonly included in an appraisal report includes:
- An evaluation of market trends in the area.
- An explanation of what the appraiser did to determine the property value.
- A description of the size of the house, the condition the house is in, the condition of permanent fixtures and any improvements that have been made as well as the materials used.
- Detailed notes describing the surrounding area including new or pre-existing developments, rural acreage and the like.
- A description of structural issues that the appraiser noticed, which could be wet basements or cracked foundations.
- A market analysis of comparative properties that supports what the appraiser has found.
- Detailed maps, photographs, and sketches of the property and the surrounding area that also support what the appraiser found.
This report should easily inform you and the lenders about what the appraiser found, and how they came up with the value of the property. You should never feel like the appraiser simply stuck a random number to your property.
Once you get the report, you should be confident that the appraiser did a lot of investigation and research before assigning a value to the property. The appraisal procedure isn’t easy, but it is a step in the home buying process that is generally required.
Understanding the Appraisal
The entire home buying process can be confusing. There is a lot of technical jargon that is used, and the contracts are full of legal phrases that can be daunting. Nevertheless, don’t have to go through the process unaware. If you have any questions, you should find someone that you can talk to. You want to be able to ask questions of someone who has a working knowledge of real estate. This could be your realtor, a financial services professional, a lender, or trusted advisor.
One word of caution: Don’t order your own appraisal without the knowledge of your lender. There are specific requirements for certain types of loans, and the lender will often need to reorder a new appraisal.
Ultimately, this step helps you figure out if you are paying a reasonable amount for the home you are buying. The house appraisal may not be the biggest part of the home buying process, but it is an important one.