What is an Appraisal and Why is it Needed?

Home buyers are still flocking to homes when they are listed for sale. Buyers continue to offer list price and above as home values are still going up. When a home buyer doesn’t pay cash for a home, he will most likely be purchasing the home with the help of a mortgage lender. The buyer is expected to have some financial interest in the home which would be their down payment.

There are different types of home mortgage loans and they each require the buyer to place a certain percentage down. For example, the buyer may put a five, ten or 20 percent down payment on a home. The bank or mortgage company pays the difference between the purchase price and the buyer's down payment, which is the buyer's mortgage loan. The loan is then set up for the buyer to pay back over 15, 20 or 30 years with interest.

The bank or mortgage company has to protect their interest and investment in the home. They want to ensure the buyer is not paying too much for the home and be sure the home is worth the price on the contract. This is why the lender has an appraisal performed.

What is a Real Estate Appraisal?

A real estate appraisal is a valuation of land or a property. It is a professional, unbiased opinion of a home's value. Licensed appraisers visit homes, take photos and take measurements. Appraisers determine whether or not a home's contract price is fitting given certain factors. These factors include the location, the size of the lot, the square footage of the home, the number of bedrooms and bathrooms in the home, the features and upgrades in the home, the home's age and the like.

According to lendinghome.com, there are three types of real estate appraisals: the sales comparison approach, the cost approach and the income capitalization approach. Appraisers also take into consideration four other essential elements. The first element is scarcity, or how many other similar homes are available. The second element is transferability, which determines if the house can be sold. The third is utility, which determines if it can be used. For example, if a house is so old and run down, it may not be inhabitable. Finally, there is demand. In today's market the demand for homes is high. There are many more buyers than homes available for sale.

How Does an Appraisal Affect the Buyer?

Once the buyer has a fully executed contract on a home, the mortgage lender has an appraiser perform the appraisal. If the home doesn't appraise for the value on the contract, the lender will not finance the home. This can be good news or bad news. The good news is that the buyer can ask the seller to reduce the price of the home to the appraised price, thus pay less. If the seller won't come down in price, the buyer may need to come up with the difference between the contracted price and the appraised price. If the buyer doesn't have the extra money, the contract may have to be canceled. This is also bad news because the buyer has, most likely, already paid for the home inspections. This money would not be refunded to the buyer. Most buyers are protected by a financing approval contingency in the contract, so they should receive their earnest money back if the contract is cancelled.  

How Does an Appraisal Affect the Seller?

According to First Centennial Mortgage Company, "A recent survey of agents shows rising prices are causing problems with appraisals. 23% of contracts were delayed and 12% then terminated due to appraisal problems, according to the survey." If the contract is cancelled due to an appraisal issue, the seller may have to start over and relist the home for sale. Sellers have to be careful not to overprice their homes too much. They should also be aware that if they receive multiple offers and accept one higher than list price, the home may not appraise.

Even though home values are rising, buyers and sellers who aren't paying cash are still at the mercy of a home appraiser.