Since buying a home is the largest purchase made in most people’s lifetime, all buyers want to ensure that they’re spending a fair amount of money on the transaction. The home appraisal process is what guarantees that a listing is being sold at its legitimate market value.
First-time buyers and sellers may be wondering, “what is a home appraisal?”
Since home appraisals are an added expense to the homebuying process, some buyers are probably asking why they need one.
To best prepare you for your upcoming real estate transaction, here is a clear breakdown of:
- What is a home appraisal?
- What is the appraisal process like?
- Key reasons why buyers need a home appraisal.
- A few things you should know about home appraisals.
What is a Home Appraisal?
What is a home appraisal?
A home appraisal determines the fair market value of a home listed for sale.
Appraisals determine the listing’s true selling price, ensuring that buyers are not paying too much or too little for their homes. Home appraisals protect buyers from paying an unreasonable amount of money while keeping lenders from over-funding the purchase. Home appraisals also protect sellers from receiving less than their home is actually worth.
What is a home appraisal process like?
Once a buyer places an offer on a home that is accepted by the seller, the home appraisal process takes place to legitimize the agreed-upon selling price.
The process is conducted by a professional and certified appraiser, who creates an appraisal report on the property that calculates what the home is worth in the current market. The appraiser visits the home listed for sale and evaluates the property — including its location, size, condition, and amenities.
The appraiser then compares their findings to similar homes in the area that have sold recently. The appraiser is able to gauge the differences between the home being appraised and the comparable properties in order to determine the most accurate price for today’s market.
How are the results communicated?
After the home appraisal appointment, the appraiser creates the official appraisal report.
Besides stating the fair market price of the home, the appraisal report contains:
- The calculations behind their valuation conclusion
- An overview of trends impacting the local market
- The home’s characteristics and location information impacting the valuation
- Any property issues and defects identified during the appraisal
Typically, the appraisal report is delivered within two to seven business days. If the lender issues the appraisal, the results are delivered directly to them.
3 Reasons Buyers Need a Home Appraisal
After reviewing the answer to “what is a home appraisal,” here are three reasons why buyers need to have their properties appraised.
#1. Mortgage Lenders Require Home Appraisals
If you’re using a mortgage to purchase your home, as did 87% of buyers in 2020, it’s likely that your lender will require the appraisal. To protect their financial interests, lenders want the homes that they are funding to be officially appraised to make sure that they are lending the proper amount of money.
This also serves the lender by ensuring that the home will be able to recoup its losses in case the borrower defaults on their loan. In these cases, the lender would be able to sell the property and save their investment.
#2. Appraisers Ensure You’re Paying the Fair Market Price for the Home
Since the appraisal keeps buyers from paying too much for their homes, they know that they are getting a fair deal.
If the property’s appraised value ends up being lower than the selling price, the buyer and seller will need to renegotiate their agreement. If the appraised value is higher than the selling price, buyers would need to discuss increasing the amount they’re able to borrow from their lender.
Even if the appraisal disrupts or nullifies the deal, it still protects buyers from spending too much on their mortgage. Since mortgage costs include interest, insurance, and fees, buyers need to make sure that their principal balance will be affordable over time.
#3. The Home Appraisal Can Identify Hidden Property Issues
While home appraisers are not home inspectors, the appraisal process can still help buyers learn more about the property being purchased.
Any hidden issues with the property’s structure or major systems would be noted in the appraisal report since it would bring down the value. Appraisers also evaluate any work conducted on the home in the past, giving buyers further insight into their home’s history.
Buyers should review the appraisal report with their agent to discuss if any issues are present that may require further investigation.
Things to Know About Home Appraisals
- The average cost of home appraisals for a single-family home in 2021 was $342, with buyers spending between $312 and $409.
- In most cases, the home appraisal costs are bundled into the buyer’s closing costs.
- In some markets, sellers may offer to pay for the home appraisal. Talk to your agent to see what’s customary in your area.
- Sellers and agents are permitted to attend the appraisal appointment, but no information may be disclosed by the appraiser until the official report is delivered.