Real Estate Appraisals -
For Lenders, Not Buyers and Sellers

real estate appraisals

Real Estate Appraisals are a necessary step in the home buying process.  There is a lot of confusion out there regarding the truth about appraisals.  Realtors, Buyers, Sellers, and Investors are often confused about their purpose think of them as home inspections, but they aren't!

Sellers often think that a low appraisal for their home is the kiss of death, but that's not necessarily true.  The more you learn about real estate appraisals beforehand, the better prepared you'll be to head off problems before they occur.

For example, I always made it a point to be on the premises whenever appraisals for my real estate transactions occurred.  I discovered I could influence the appraisal price in subtle but hugely profitable ways.

Here's what I mean!  If I were selling a "fixer-upper" and hadn't made any improvements yet, I'd walk through with the appraisers and point out the things I was going to do to improve the properties to get maximum value before closing.  They would, in turn, come back with an appraisal that was "subject to the improvements being made," which was sometimes tens of thousands of dollars more than the "as is" value was!

Since very few people can pay for a house with cash, an appraisal will be necessary.  A loan is never going to go through without one.  The purpose of the appraisal is to establish the home's market value.  The sales price will be based on the market value.

The main goal of the appraiser is to protect the lender.  Lenders don't want to be stuck with a property not worth its price tag, so the appraisal must be completed before the lender approves the loan.  The information contained in Real Estate Appraisals is invaluable to the lender.  The lender will study the details of the appraisal before reaching a final decision. 

The lender will often dictate the choice of the appraiser.  It might have one in-house or through a contract with an independent appraiser.  If you go with your own choice for the appraiser, they may be subject to final approval from the lender.

Residential properties are typically appraised using either the sales comparison or cost approach.  When using the sales comparison approach, an appraiser compares the property to similar properties sold in the area and bases the market value on the comparables or comps.  The cost approach is based on building costs, which means it is more appropriate for new properties. 

The actual appraisal reports are very detailed.  They contain information about the subject property and comparisons of a few similar properties.  There is an evaluation of the overall house market within the area.  The appraiser will then list any issues that they feel might diminish the property's value. 

The next component is a list of serious problems like bad roofs or weak foundations.  The appraiser then gives an estimate of the sales time for the house.  Finally, the report will indicate the type of property.

It is important to note that a real estate appraisal is not the same thing as an inspection.  The appraiser might report any problems they see, but they are not responsible for declaring if your home is in good condition or not.  They are only responsible for assessing the property and determining the market value for the lender.  A home inspection is a different process altogether.

Real estate appraisals only include the home, the land, and any improvements to the land.  It does not cover any personal property that might be sold with the house.  The buyers should purchase those items separately. 

Everyone fears the possibility of a low appraisal.  It happens all of the time, usually during closing.  There are some things you can do to remedy this common but stressful situation.  The buyer can make a larger down payment.  If this is not feasible, the seller and buyer can negotiate the price some more.  Additionally, the appraisal can always be disputed. 

What all goes into an appraisal?  Appraisers are looking at the condition and size of the house, its proximity to good schools, and the size of the lot.  Appraisers do not look at dirty dishes or overflowing laundry baskets.  They care about chipped paint, broken windows, and appliances that don't work.

Real Estate Appraisals are not being conducted by just anyone off the street.  Real estate appraisers are trained professionals licensed by the state where they work.  They are qualified for their work by completing state certification requirements like exams and continuing education courses.  This line of work demands strong critical thinking skills and the ability to interact with different groups of people.

"Get the real estate appraisal right, and you can close profitable, hassle-free transactions. Get it wrong, and it might cost you some money, the successful transaction of the property, or both!"

Next: Closing Costs

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