If you are in the market for a home or have ever purchased real estate, you probably have an idea that property appraisals are involved somewhere in the process.
When buying a home, many people have to make use of borrowed money, most often from a lending institution. When a lender is considering your application for a loan, they review everything from your debt and income, to the value of the property you are trying to purchase. There is a good reason for this. Should you, for some reason, default on the loan (stop making payments), the lender may be forced to sell the property to help recoup the outstanding money owed to them from the loan you stopped paying on. This is where the value of the property becomes important.
Why do you even need an appraisal?
A lender wants a pretty specific value of a property before they approve your loan. If they over-value the home and lend you more money than the home is worth, they will be unable to sell the property for what they have invested in it. Lenders rely heavily on the skill and information that a qualified appraiser can bring to them.
What affects the value?
Property appraisals are usually influenced mostly by the current market. An appraiser will compare the subject property’s amenities, such as the number of bedrooms, bathrooms, square footage, upgrades, and condition, and then compare it to other properties on the market. While properties currently for sale are considered, more weight is given to properties that have already sold in the area. This is because a property can be for sale, but far overpriced, and does not lend itself to a realistic price-valuation for the subject property.
How can you compare two different properties?
When there is not an exact match for the subject property, and they’re rarely is, the appraiser can add or subtract standard numbers from comparable properties. (Money may be subtracted from a comparable property for having one less bathroom, or money added for a pool that the subject property does not have. ) This is what people are talking about when they refer to “comps”. Comps are simply other similar properties that an appraiser can use as a reference for value.
What can an appraisal value mean for your loan?
If the property you are trying to purchase gets appraised for a higher value than the agreed, contracted, sales price, you’re in great shape! That tells the lender that if forced, they can sell the property with little risk of being out money on the deal, should you default on the loan.
But what if the appraised value is lower than the sales price?
Then things can get a little tricky. If the appraised value is lower than the amount you want to borrow, the lender can reject the loan. If they are unwilling to loan you the amount of money you need, you may simply have to walk away from the purchase. If you believe the home does have value above the appraised value, you are able to come up with money out-of-pocket to apply to the loan yourself. Basically, you are making up the difference. Some buyers simply don’t have that extra cash and are forced to end the loan process due to the lower appraised value.
What if you disagree?
Of course, there are thousands of variations of circumstance, but generally, a lender will procure one appraisal on a subject property and stick with whatever value that appraiser attributes to it. And, lenders hire the appraisers, not the borrower, so if you disagree and want another opinion, it’s most likely going to be for your own peace-of-mind, and probably won’t affect the loan approval.
It can all seem a bit overwhelming when you are trying to purchase real estate. Keep in mind that having a qualified appraiser involved in your loan approval is one more layer of assurance, not just for the lender, but also for you. Premier Appraisal Valuations is your go-to Fox Valley or Appleton appraiser. Come see us or give us a call to learn more about all the services we provide, which includes valuations, estate appraisals, property appraisals, home value estimates, and much more!