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How Home Appraisals Work

home appraisals

An appraisal is the process of determining the value of the property for lending purposes, although that is not the only way home appraisals can be used. Because the value of property sometimes differs depending on who you are speaking with, a professional will come in and help determine the true worth of the property based on numerous data points.

As a home buyer or seller, you will definitely have strong feelings about what your property is worth or what you would pay for a piece of property. Your realtor may have a different view on what your property can sell for or how much a purchase is worth.

What make this even better is the likelihood the lender will have their own opinion on the value of any piece of property you are wanting to obtain, or offload.

So, how do home appraisals help when it comes to financing?

The lender’s value as determined by the appraiser or through systematic valuation is what matters when home appraisals are requested.

With an appraisal, the lender sends a qualified appraiser to your property. He or she prepares a detailed appraisal report for the lender that outlines how the appraiser calculated the value of the property, together with any comparable properties that were used (often supported by pictures).

With system valuation, the lenders leverage valuation databases and look at the comparable properties sold in the area to arrive at their valuation.

How Do I Handle Discrepancies in Home Appraisals?

Some people may find a huge discrepancy between the appraised value and the purchase price or refinance value of the home you intend to buy. This is rare in home appraisals.

With most purchases (especially purchases of solid properties in excellent areas), it is unlikely for any significant discrepancies to occur between the appraised and purchased value of property.

In weaker real estate markets, or if the property is in rough shape, the risks of such discrepancies may be higher. In that case, you have few options:

  • Negotiate a better price before proceeding with the purchase.
  • Pay the difference.
  • Get a second opinion on the appraisal by requesting another company handle the appraisal.

Choosing a plan of action will depend on how big the discrepancy is and the timelines associated with the waiving of the conditions. Your real estate agent will often help you determine the best course of action.

Discrepancies between the Appraised Value and the Refinanced Value

Most home appraisals have errors during refinances as opposed to during purchases. Often the property owner wants to take out some or all of the existing equity and she or he has a certain perceived value of how much their property is worth. The discrepancy is often present during slowing real estate markets.

However, for the most part, most appraisals are accurate even in down markets – even if one only goes by the value of neighboring homes.

Comparable properties, known by insiders as “comps”, are one way to expedite the appraisal process. However, if the appraisal cannot find sufficient comparable properties, he or she has to conduct more research on the area. By looking at comparable properties within a three to a four-mile radius of where the property is located, an accurate appraisal can be generated.

Do Not Confuse Appraisals with Inspections

Home inspections are required by FHA and other lenders to make sure homes are habitable. It also helps potential home buyers understand what problems may exist before they settle on the home.

Home appraisals are done almost exclusively based on aesthetics and comparable home sales.

We will tackle home inspections at a later time. Until then, make sure to bookmark the Sold21 Blog.

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