Just as mortgages are intrinsic to the home buying process, home appraisals are intrinsic to mortgages. Without home appraisals, the real estate market would be chaotic. Sellers would ask for outrageous home prices and buyers would want to buy homes for pennies. Thanks to the home appraisal process, there is balance. A professional appraises properties and evaluates the homes to make sure that homes are sold for fair prices, sellers don’t make unnecessary demands and buyers don’t get short-changed in the process.

Home appraisers follow guidelines for their examinations and they make sure that the property values are appropriate based on various factors, like the neighborhood, material used, age of the constructions, amenities, etc.

What Is a Home Appraisal?

A home appraisal is a process during which a licensed professional examines the property to make sure that it is being sold for a fair market value, aside from this the appraiser also makes sure that the property conforms to local codes and it is a safe place to live for a homeowner. This is an important assessment for borrowers but home appraisals are vital for the lenders too. The amounts being loaned out to borrowers are very high, lenders take risks when they loan out money. In the case of mortgages, the property is used as collateral. If the property is being sold for higher than it should be worth then the lender will experience a loss on the deal. This is how if a seller is asking for more than the property should be worth then the appraisal makes sure to provide a detailed report about why the asking price is too high, which protects the lender before they extend the loan to the borrower.

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What influences a property’s value?

There are many considerations for the appraisal but there are 6 that play the most key roles in the assessment.

1.  Neighborhood

The neighborhood where a property is plays an important role in determining the value of homes in the area. In a neighborhood, appraisers will look at the kind of neighborhood it is (urban, suburban, rural, etc.), types of properties in the area, zoning classification, utilities available in the area, etc. such things go on to define the price ranges of homes.

2. Location

The neighborhood which holds the property is related to another important aspect. The location of the property. If the area of the property is developed and has a low crime rate, proximity to emergency services (fire station, hospitals, police station, etc.), condition of other properties in the area, maintenance of close by homes, etc. All these details are related to the exact location of the property and considered at the time of home appraisal.

3. Size and Usable space

When house hunting, prospective home buyers care a lot about the sizes of the rooms overall and a house with an attic, basement, or garage at an affordable price is a steal. The appraisal perspective is different. When appraisers take note of the property they consider the price of the home on a per square foot basis. Mainly this consists of counting the square foot of livable space of the house. Any extra rooms will be counted separately. From this, we learn that the appraisal is prioritizing the essentials that make up a home and then looking at everything else as additional to the property.

4. Age and Condition

The difference between old and new constructions is an obvious one. Newly constructed properties will have amenities related to the basics of that era. Recently developed properties will have the use of modern structures, materials, and even the latest technology. Many new houses will have the potential for green energy usage. Older properties will be based on older or maybe even obsolete construction methods, use of hazardous material, etc. How old or new a property affects the people living in the property and the property is assessed accordingly.

5. Upgrades and Updates

While homes are static, modern-day knowledge is not. Thanks to new research there is always information coming out about the latest techniques in construction and making materials. Old material becomes outdated in favor of new ones. This means that what makes a house “modern” also changes. Homeowners that care about their property values, will often invest in keeping their properties up to date with the latest. A well-maintained property does well in the market and also in appraisals. During the appraisals, the appraiser takes note of how the property compares to those in a similar price range.

6. Local Market

How well and or how fast properties sell in an area go on to describe the kind of market it is. If the properties in an area are selling off fast then it is likely that there are more buyers than there are sellers, which means the sellers have the edge on setting the prices, the buyers must compete to purchase the property, this is known as a Seller’s market. Similarly, a buyer’s market is one where real estate sales are slow because there are more buyers than there are sellers, this is known as a buyer’s market.

What is the process for Home Appraisal?

It would be a complicated situation if all appraisers checked properties according to their preferences, this could lead to property prices being all over the place and a lot of potential for corruption. To avoid exactly such a scenario the Federal National Mortgage Association (Fannie Mae) created the Uniform Residential Appraisal Report. This report is a standardized format that all appraisals must adhere to. Thanks to the format, it becomes clear what information the appraisers are to focus on and how they need to collect this information. This creates uniformity among appraisal reports that allows for a check and balance.

This report requires appraisers to take pictures of the property’s exterior and interior, along with pictures of the surrounding area. They are to take note of the home’s age, construction, material, amenities, utilities, etc. They are also required to write detailed notations on their observations.

What Homebuyers Need to Know

Ideally, after all the time invested in the mortgage process, buyers would prefer that the appraisal comes back to match the seller’s value. In this case, the mortgage process will continue as usual towards closing. However, it is possible in some cases that the appraisal reports come back saying the seller’s price is higher than it should be, in this case, the deal with the seller will be canceled and if the buyer is still interested in purchasing the property, the new pricing will be negotiated. It is possible for the buyer to work with their lender and real estate agent to negotiate a deal that is more favorable to them.

What Home Sellers Need to Know

Like the buyer, most sellers would prefer that their prices match the appraisal and the deal comes through. However, another important situation for the seller would be when the appraisal prices come back as higher than the asking price. In this case, the seller has to make a choice between two options. They can opt to continue the deal as is, ignoring the higher price reported in the appraisal or they can inform the buyer that they have to pay the new, higher price. Depending on the exact price from the appraisal, in this case, the buyer might cancel the deal or they might agree.

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