What it is, why it’s important, and how it can save you money.
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You’ve probably heard of this term, but do you know how important it is to have to determine how much lenders will give you? Don’t waste your time on a home that’s asking price is higher than what the property is truly worth. Take the time to get a home appraised first to figure out what the real price of a property is, and to get a lender to match that amount.
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A quality home appraisal is going to drastically change how you regard a home you’ve been considering purchasing. Think of it as an objective opinion on what the total value of the property is worth. It’s a baseline that you can go off of before you make your final decision. Let’s clear up some common myths to help give you a better sense of what an appraisal is all about.
Myth #1: The appraiser and inspector are the same person.
They are actually two different professionals, and yes you’ll need to hire and pay for both. They might feel similar because both need to tour the property, but they are looking at different aspects of your home. An appraiser is a certified state-licensed professional who gives an expert opinion of the value of the property. This review is objective, taking out any variables that could sway people to pay more than the place is worth. The Inspector will look at specific areas of your home to make sure things are up to code and that there are no hidden faults in the home that could cause problems later
Myth #2: It doesn’t matter when you get a home appraised.
You should get your home appraised while applying for a mortgage to make sure you get the amount you need to make this purchase. A lender will suggest getting an appraisal, and will most likely have list of qualified, approved appraisers on hand for you to call.
The reason lenders want a property appraised first is to protect their investment. They want to make sure they lend you the proper amount of money so that in case you can’t pay your loan, they will still be able to get their money back selling this property. An appraisal also helps you, the buyer, in making sure the asking price is reasonable and fair. It’s going to be near impossible to get a lender to give you the right amount of money for a home that’s been marked up.
For example, if a home is listed as $300,000, but appraised at $250,000, you’ll only get $250,000 from the lender. You will either have to ask the seller to lower their price or find that extra $50,000 to be able to purchase at the asking price. An appraisal at the beginning will help set a fair price for everyone to base decisions on.
Myth #3: Only the home itself is appraised.
Actually, the home, any other structures on the property, and the land itself are all included in an appraisal. What your appraiser won’t cover is if something isn’t up to code. That’s the inspector’s job.
The appraiser is going to look into these five major areas:
- Lot Size. This includes if the property offers room for additions and the total amount of rooms the home has. The more space and rooms, the better.
- Exterior. Your foundation, siding, and roof will be looked at for damage, materials they are made out of, current condition, and age. If there are any defects or cracks, those will be noted.
- Interior. Similar to the exterior evaluation, materials will be looked at here as well. Things like kitchen appliances, plumbing, lighting fixtures, windows, flooring, walls, and other similar aspects will be looked at closely to determine their current condition. Any damages or malfunctions will be noted.
- Features. Things such as a garage, fireplace, security features, and fire alarms will all add value to the appraisal. These are added amenities that give a higher level of comfort and safety to an owner, therefore increasing its appraised value. For example, if there is an air conditioning unit in a home located in a warmer climate, that’s going to be a big plus.
- Improvements, Upgrades, and Repairs. Any improvements to the condition of the home will be highly inspected. Sometimes homeowners will upgrade a bathroom or kitchen appliances, which both add major value to the home.
Myth #4: If the lender asks for the appraisal, then they pay for it.
You will unfortunately have to foot this bill, and it can run around $400-$500. It’s not that expensive in the grand scheme of things though, especially if you can get a more reasonable asking price in the end. If you think the appraisal’s number is off, you can always ask for another opinion; just know that you will have to pay for that as well.
There are two types of appraisals:
#1: Sales Comparison Approach (known as a “comp”)
This method compares the property you’re interested in to three or four other homes in the area that just sold. Also taken into consideration is the size of the lot, the age of the home, and the style it’s built in. The square footage of both the finished and unfinished areas are also considered. Then, the features are added on to the appraiser’s list, such as garage space, a fireplace, or a large back yard.
#2: Cost Approach (usually for newer homes)
For newer built homes, an appraiser will take a different route to determine its value. He or she will total up the cost to replace the structure if it were destroyed, the value of the land, and the percentage of depreciation to come up with the true asking price figure. This makes sense since it’s harder to judge factors like wear and tear on a newer property.
Myth #5: You should only look for a certification when choosing an appraiser.
An appraiser should be well rounded. Make sure he or she also knows about the area, and check each reference thoroughly. When you get a list of qualified appraisers from your lender, carefully research each one to help you make the best decision. Look to see if one has a residential appraisers certification (specific to homes), and a professional designation (a qualification to appraise homes). A good appraiser will know about local foreclosures and short sales that could affect their stats, and will display this knowledge during your initial conversation. You can and should meet with your appraiser on the day of the home tour too, to see all that they cover.
Getting an appraisal might feel like a hassle now, but this added step can drastically change what you’ll ultimately pay for a new home, and could save you money as well as sanity down the road.