With The National Association of Realtors reporting on a market where “buyers battle for a smaller pool of homes and bid prices upward,” as a homebuyer, you need to make sure you are not paying more than any home you are interested in is worth.
A real estate appraisal will help determine the fair market value (FMV) of the home for sale, and it also impacts you as the buyer in other important ways.
1) Estimates Fair Market Value
A professional Appraiser will conduct a thorough examination of the home for sale using one of two methods – sales comparison (resale), or cost method (new construction).
Unlike a home inspection which simply reports on the condition of the home, the condition of the home is only one factor taken into consideration when determining the home’s overall value.
The appraiser will estimate replacement value for new construction, or conduct a thorough comparison of the resale home with several similar homes (comps) in the area, using their experience and knowledge of the local market.
The resulting appraisal is a Final Report of Value.
2) Determines Financing
Knowing the FMV of the home in question is a requirement demanded by the lending institution, which influences you as the buyer.
The home (asset) is essentially the collateral for the loan that the lender will give you as part of your mortgage agreement. The appraisal helps them determine if they will lend you money, and if so, how much.
The appraisal also helps the lender ensure that they will be able to recoup their investment (amount of loan), should they need to sell the home in the event that you foreclose.
3) Provides You Benefits – And Protection
If the sale price is significantly different than the valuation, it will affect you in one of two ways.
If the home appraises higher than the sale price, that’s good for you. That means you’ll have instant home equity.
If the home appraises lower than the sale price, as long as your offer was contingent upon an appraisal, you have the option to withdraw your offer. In that case, the appraisal protected you from paying more for the home than it was really worth.
If you and your Realtor believe the appraisal report is flawed after carefully reviewing the comps and other documentation used in the valuation, you and/or the seller may be able to challenge the findings with the lending institution refusing your mortgage.
Know The Appraiser
With the sale of the home you want hanging in the balance, the quality and experience of the Appraiser providing the Final Report of Value is so important.
Be sure your lending institution is using the most qualified, accredited valuation professional with local market knowledge.
Most lending institutions hire Appraisers through an impartial Appraisal Management Company. Learn about state compliance here.