Everything You Need to Know about Home Evaluation & Appraisals

home appraisal guide

If you’re entering the market for a new home, using a mortgage, refinancing your current mortgage or selling your home to anyone other than a cash-buyer, the home evaluation and appraisal is a critical part of the overall transaction. Buyers, sellers and owners need to have a good grasp on the evaluation process, how it works and how your home’s value is determined.

Evaluations and appraisals will establish whether a home is worth the purchase price and can help lenders authorize loans. Homeowners can use appraisals to set a listing price, assessing property taxes and more. As important as this process is, it’s helpful to know everything about home evaluation and appraisals. So let’s get started!

What is a Home Evaluation?

A home evaluation is an unbiased expert opinion of a home’s worth. Evaluations are used with virtually every purchase and sale transaction and are commonly used in refinancing transaction as well. By evaluating a home’s condition, location, features and issues, a buyer or seller will know the perfect price point in a purchase and sale transaction. If you’re going through refinancing, it makes you more credible in the eyes of the lender, keeping him protected from lending more money than the home’s worth.

Since the home serves as collateral for the mortgage in the case of a default, lenders don’t want to give more money than the home is worth in case the buyer isn’t able to make payments. This evaluation helps the bank stay protected so they can recoup their losses should the home be foreclosed on and they’re forced to sell.

How Appraisal Values are Determined

You may be curious as to how these appraisal professionals come up with their price point. There are several methods for determining the value of a home – here’s how it’s done.

Conducting Research

To start, an appraiser will use several different tools that they have at their disposal to determine the value of a home. He’ll first conduct a full inspection of the property in question, looking over the home to establish its condition, followed by a proper assessment of the neighborhood it’s situated in. While researching the neighborhood, the appraiser will compare and contrast surrounding areas to see how the home relates to other nearby properties. He will analyze tax records to view the assessed value of the home and past sale prices, as well as loan details that are accessible through public records. He also pulls tax and real estate listing data on any similar houses within a mile radius that have been bought within the last four weeks.

Comparing Similar Homes

After the data is gathered from the home and neighborhood evaluation, the appraiser will compare similar homes to the one in question. They will find homes that are as close as possible to the same size, age and amenities. This will move the price point either up or down depending on the comparable features they may or may not have. For example, your home may be the same size as three other houses in the city but is on a larger plot of land. People will pay top dollar for an acre of land in the city, so the appraiser will add that to the recorded selling price of the comparables to find the final value of your house. This is the most popular and accurate method to determine the market value of your property.

No Comparables for a Unique Property

When there are no comparable houses to evaluate yours against, such as a historic home, remote property or custom-built house with unusual construction, the appraiser will determine the value through the cost approach method. This involves a comprehensive inspection of the property, including evaluation of building material quality and features of the home to get a rough figure to work off of. Following this, he’ll calculate the depreciation percentages. This can include anything from the age of the furnace and viability of location, to economic and physical obsolescence. Physical obsolescence, for example, could come in the form of a feature that may have been prized at the time it was constructed, such as an old call system in a historical home that may look cool, but does not have a great deal of value in today’s market. An example of economic obsolescence would be an old home that’s located next to a recently built power plant. Additionally, systems such as air conditioning or heating systems with a 15-year life span that is 10 years old may only be given credit for 25 percent of the value of a new system.

Commercial Property Appraisal

For commercial real estate buyers and sellers, appraisers will use the income method to decide the value of your investment and commercial properties. Value is determined not just by the property’s value alone, but also by the income the property is generating. Rental and licensing income, as well as additional revenue, is calculated into the final number which appraisers get from public tax and income records and profit/loss statements.

What You Need to Know as a Buyer

When you’ve finally decided on a home, made an offer and signed a contract, the appraisal will be one of the first tasks completed during closing. If the appraisal comes in below the contract price it could unhinge the entire transaction, with the buyer now possibly lowering or retracting their offer. If the appraisal comes in at the right spot or is above the contract price, the transaction can go ahead as scheduled.

When you get to this point, however, it’s unlikely that either the buyer or the seller will want the transaction to fall apart. As a buyer, a lower appraisal is actually good for you, as it gives you leverage to negotiate a lower price so the sale can go through. As mentioned earlier, a lender won’t give you any more money than the home is worth to protect themselves from a loss, which can create a sticky situation should the seller feel the low appraisal is inaccurate. If a low appraisal and counter offer are standing in the way of you purchasing your home, hire a second appraisal professional to affirm the price. This will help reassure both parties that the price is fair and the transaction can be finalized.

What You Need to Know as a Seller

Unfortunately, no one wants to pay more for a home than it’s worth, which is important for you to understand as a seller. If a low appraisal comes through, you’re essentially forced to lower your home’s price to actually sell it. Any reputable bank won’t lend money for more than a home is worth, meaning you’ll be waiting around for an all-cash buyer to come along and take the property off your hands, which is highly unlikely.

Something outside of your control can also cause lower appraisal prices, in the form of surrounding property values. If you feel your home’s value was unfairly appraised because surrounding properties have low sales prices, are being foreclosed on or sold short, you may be able to persuade the appraiser to alter his recommendation based on your home’s condition. As a seller you should also understand federal guidelines, which are actually intended to remove the inflated appraisal values that contributed to the housing market crash of 2007, can often cause appraisals to come in below fair market value and can make low appraisals harder to object.

What You Need to Know when Refinancing Your Home

For those homeowners that are trying to refinance their conventional mortgage, a low appraisal may block any refinancing efforts you’re pursuing. For your loan to be authorized, your home has to be appraised at or above the number you’re targeting. However, if your existing mortgage is issued by the Federal Housing Administration (FHA), you’re able to refinance without an appraisal through the FHA Streamline program. FHA Streamline is a fantastic option for those homeowners who are struggling to keep up with payments.

Getting Your Home Ready for Appraisal

If you’re about to go through an appraisal, here are some things you can do to ensure that it comes in at the highest price point possible.

  1. Make small repairs – those minor repairs that you’ve been delaying, such as servicing all the major systems, having the floors professionally cleaned or finishing DIY projects, can give you a big boost in the value determination of the home. For appraisers, the condition of a home is often more crucial than the year in which it was built.
  2. Boost your curb appeal – curb appeal is huge in enticing potential buyers and a properly maintained landscape and home exterior can do wonders to enhance your home’s value. You can grow gardens, mulch flower beds, swap out outdoor light fixtures or stage patios and porches.
  3. Know the comparable properties in the area – when you have a solid idea of what comparable homes in your neighborhood are selling for, you can push back on low-ball offers and appraisals. Find out the selling price for properties that have been sold within the past six months and then go visit them in person or check out their MLS listing online. This should give you the knowledge you need to ensure the price is on point.

Best of Luck with Your Home Evaluation & Appraisal

When the appraisal comes in at or above asking price, it’s just another item to check off on a long list of closing tasks. If the appraisal comes in lower than you expect, your transaction could be delayed, negotiated or even canceled. No matter what situation you find yourself in, for home buyers, sellers and those refinancing, when you have a deep understanding of the appraisal process, things are more likely to work out in your favor.

If you’re looking for consultation for home evaluation and appraisal, turn to the real estate experts at AD Hays Group. We’ll help you get the price you want whether you’re buying, selling or refinancing. We have more than 30 years of experience, hundreds of successful closings and a streamlined process to ensure that all of your real estate goals are met. If you’re looking for your dream home in the Minneapolis/St. Paul area, AD Hays Group will help you through the entire process from start to finish. Ready to get started? Get in touch today.

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