The home buying process includes many steps, some easy and some not. If a home buyer is borrowing money to buy a home, there are more than steps involved in the process than someone who is paying cash. If a buyer is using a lender, soon after a good home purchase offer is accepted and once the home buyer has entered the escrow period, an appraisal is performed by the lender. Understanding appraisals and their purpose can help the home buyer through the escrow process. Here's what you need to know.
What Is a Real Estate Appraisal?
A real estate appraisal is a professional assessment of a home's market value. Usually an appraisal is performed by an independent 3rd party that is licensed in the state where the appraisal is taking place.
An appraisal begins with an inspection by the appraiser, and ends when the professional writes a report recording the value of the home. The report is made available to the buyer and the lender. Sometimes the appraisal is paid for when the appraisal takes place, other times the appraisal fees are paid for at the end of the home purchase and are included within the closing costs.
Is Appraisal Required? Why?
An appraisal is usually required if the buyer is applying for a mortgage. An appraisal is not a requirement if the buyer is planning to pay for the home in cash.
The purpose of the appraisal is to ensure that the price the home buyer is paying is at or below the market value of the home. The mortgage lender requires the appraisal to ensure that the bank will not loan the buyer more than the home is worth.
Even if the buyer is paying for the home in cash, an appraisal may still be a good idea. The appraisal helps ensure that the buyer is not over-paying for the property. A buyer who pays more than the value of the home may not be able to recover their investment when they sell the house.
What Happens If the Home Doesn't Appraise High Enough?
Many buyers are encouraged by their real estate agents to include an appraisal contingency into the home purchase contract. This contingency allows the buyer to cancel or renegotiate the purchase offer in the event that the home appraises for less than the offer price.
Many sellers will renegotiate the purchase price to avoid losing the sale, but some will not. As long as the appraisal contingency is in place, the buyer is protected. The home buyer's real estate professional can help the buyer to ensure that the contract is written with the proper clause in place.
What Factors Does the Appraiser Take Into Consideration When Performing An Appraisal?
The appraiser considers many variables during the appraisal process, including the home's location, comparable properties in the area, characteristics about the home that may increase or decrease the property's value, and other factors. Features that may increase the value of a home are a view or a large lot. A factor that may decrease a home's value is deferred maintenance. This information is usually included in the report written by the appraiser.
What's the Difference Between an Appraisal and a Home Inspection?
A home inspection is a detailed, thorough report about the various systems of the home and their condition. The home inspection does not name the value of the home; only its condition. The appraisal gives less detail about the condition of the home and instead focuses on the value. Although certain structural or maintenance problems may be addressed in the appraisal, this is not the primary goal of the appraisal document.
Work With Your Real Estate Agent
If you're a Hermosa Beach home buyer, talk to your real estate agent about the appraisal contingency and the home appraisal process. Your real estate professional can answer your questions and help you decide whether the appraisal contingency should be included in your home purchase offer.