Whether you’re buying or selling a house, if a mortgage is involved in the transaction, you need to know about appraisals. A home appraisal is an estimation of how much a property is worth, typically based on how much similar properties in the same area have recently sold for.
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Appraisals should be important to buyers and sellers because they’re extremely important to mortgage lenders. If the appraisal value is lower than the sale price of the property, lenders are likely to refuse to complete the transaction. This is because the lender wants to ensure that if the buyer-borrower defaults on the mortgage, selling the property will result in recovery of the entire loan balance.
Appraisals are usually paid for by the seller, and cost approximately $300 to $500. The fee is based on the type of property, the square footage, and the location. Thus, the fee to appraise a property that is enormous has multiple units, or is in the middle of nowhere can be higher.
The most common type of appraisal is based on “comps,” which are sales of comparable properties in the same area as the property being appraised. The basic condition of the property’s interior and exterior are also taken into account. However, if a property has new construction, the appraisal may instead be based on the building cost.
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It’s important to note that appraisals differ from inspections. An appraisal solely determines the value of a property, and while the appraiser may take condition into account, he or she does not conduct a thorough examination of the property. By contrast, an inspector should thoroughly examine the property and note all defects, both large and small.
Generally, lenders choose the appraiser, since they care very much about the accuracy of the appraisal. However, buyers and sellers can and should request that the selected appraiser meet certain conditions, such as knowledge of the local real estate market and professional certification.
Low appraisals tend to occur in a slow housing market because there are few comps, which makes it difficult for an appraiser to determine a property’s current market value. If an appraisal is lower than the agreed-upon sale price, a lender will likely not approve the mortgage. To salvage the sale, the seller can lower the price to match the appraisal, the parties can seek a second appraisal (which will need to be accepted by the lender), or if the lender agrees, the buyer can pay cash to the seller to make up the difference between the sale price and the appraisal. Most likely, however, the sale will not be able to proceed if the appraisal value is lower than the sale price.