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A real estate appraisal helps to establish a property’s market value, i.e. the likely sales price it would bring if offered in an open and competitive real estate market. The lender will require an appraisal; it wants to make sure that the property will appraise for at least the sales price you have agreed to pay. The lender is not looking for the appraisal only to cover the amount of the loan. The lender is looking for the appraisal value to be equal or greater to the agreed upon sales price.
Don’t confuse a comparative market analysis, or CMA, with an appraisal. Real estate agents use CMAs to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAS, but an appraiser’s report is much more detailed and is the only valuation report a bank will consider.
About Appraisers and Appraisals:
- Appraisers are licensed by individual states after completing coursework and internship hours that familiarize them with their real estate markets.
- The appraisal is ordered by an appraisal management company who oversees the appraisal choosing, ordering and monitoring process for a bank or mortgage lender.
- The property being appraised is called the “subject property.”
What You’ll See on a Residential Appraisal Report:
- Details about the subject property, along with side-by-side comparisons of three (or more) similar properties.
- An evaluation of the overall real estate market in the area.
- Statements about issues the appraiser feels are harmful to the property’s value.
- Notations about seriously flawed characteristics, such as a crumbling foundation.
- An estimate of the average sales time for the property.
- What type of area the home is in (a city, a development, stand alone acreage, etc.).
Residential Appraisal Methods
There are two common appraisal methods used for residential properties:
“Sales Comparison Approach”
The appraiser estimates a subject property’s market value by comparing it to similar properties that have sold in the area. The properties used are called comparables, or comps. No two properties are usually exactly alike, so the appraiser must compare the comps to the subject property, making adjustments to the comps in order to make their features more in-line with the subject properties. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.
The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.
So What Does the Appraisal Mean to You?
If the property appraises lower than the sales price, the loan might be declined, but that isn’t the only hurdle it must pass. Other facts on the appraisal can be a problem, too:
- The lender probably won’t like it if the estimated time to sell the property is longer than the area average.
- If the appraiser notes that entry to the property is from a private, shared road the lender might want to see a road maintenance agreement signed by everyone who uses the road, verifying that maintenance is shared by all parties.
- The lender may not trust the value of the appraisal if there is no recent data and all the comps are older sales (older than 6 months).
Those are just a few examples of negatives that could stall your purchase. The lender will study the appraisal carefully before determining whether or not the property qualifies to serve as security for your loan.
An Appraisal Isn’t a Home Inspection!
Appraisers make notations about obvious problems they see, but they are not home inspectors. They do not test appliances, inspect the roof, check the chimney or do any other typical home inspection tasks. Never count on an appraisal to help you determine if the home is in good structural condition.