Appraisal
The question "How much is it worth?" is subjective, and the answer depends on who you ask. A seller might think a property is worth more for sentimental reasons. A buyer might think it's worth less because of the shape it's in. A lender cares only about how much they can sell it for if they end up owning it in foreclosure. An appraisal will help to establish the market value of a property and the likely sales price it would bring in an open and competitive real estate market. Your lender will require that an appraisal be done.
You don't want to confuse an appraisal with a comparative market analysis (CMA) given to you by a RealtorŪ. RealtorŪs use CMAs to estimate realistic prices, and a good agent often comes very close to the appraisal price. But the appraisal is much more detailed and will be used by the lender in determining how much they will lend.
Real estate appraisers are trained, certified professionals licensed by the state. They should be objective third parties who have no financial interest in the transaction and no connection to anyone who does.
A few of the things you will see on an appraisal are
- Details about the subject property and comparisons of three similar properties nearby
- A statement about the overall real estate market conditions in the area
- Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property
- Notations about seriously flawed characteristics, such as a crumbling foundation
- An estimate of the amount of time it will take to sell the property
- What type of area the home is in (a development, stand alone acreage, etc.)
The two most common types of appraisals for residential properties are the Sales Comparison Approach and the Cost Approach. The Sales Comparison Approach is most common for resales. This method estimates the value by comparing it to similar properties in the area, called comparables. The Cost Approach is helpful for new construction, where building costs are known. In this case, the appraiser simply estimates the cost to rebuild if the property is destroyed.
You may be happy with the appraised value, but the bank has to be happy too. They will study the appraisal more carefully than you are likely to. Just be aware that it is their final approval of the appraisal that secures your loan approval.
If an appraisal comes in low, talk with your RealtorŪ and don't panic. There may be a number of ways to still get the deal done. There may be mitigating factors the appraiser overlooked. The appraisal determines how much the bank will lend on it. The buyer may be able to make up the difference in cash, or you may need to lower the price. You should be realistic though. If you are hoping to sell your house for substantially more than it will appraise for, you may be in for a rude awakening.
