Did you know that real estate appraisals are required on a property whenever it’s financed – whether you’re buying a new home or refinancing?
Many people don’t really know how appraisals fit into the home buying and refinance processes, so stick with us, and we’ll make sure you understand what appraisals are, who does them and why they’re required.
We’ll get into this in more depth below, but for right now, the important thing to know is that an appraisal is a professional opinion on the market value of your home. It’s required by lenders because mortgage investors such as Fannie Mae, Freddie Mac and the VA won’t lend more than a house is worth. This helps make sure they can get back as much of their investment as possible if the worst happens and they have to foreclose. It also helps protect the buyer by ensuring they don’t pay more than the house is worth.
But first, let’s go over two commonly confused terms. What’s the difference between an appraisal and a home inspection?
Real Estate Appraisal vs. Home Inspection
A real estate appraisal is the practice of developing an opinion of the value of property, or what is commonly called “market value.” Appraisals are done by trained professionals. Many states require appraisers to do a lengthy apprenticeship before working on their own.
Appraisals can vary by state, but there are three main parts to a home appraisal:
- The inspection – A licensed appraiser comes to the property and inspects it to determine fair market value
- Research on comparables – After the inspection, the appraiser researches similar homes in your area and compares recent sales to determine market value
- Final appraisal report – using the data gathered from the inspection and comparables research, the appraiser issues a final appraisal report
A real estate appraisal inspection is not the same thing as a home inspection, which takes place when you’re buying a home. A home inspection is much more in-depth and designed to find things wrong with a home, such as problems with the foundation, a defective furnace, a roof that’s been improperly installed, etc. An appraisal will take obvious defects into account, but the appraisal report isn’t intended to detail all the flaws for you the way a home inspection report does.
What an Appraiser Is Looking For
The most obvious place to start when talking about an appraisal is the inspection. When looking over both the interior and exterior of your house, what’s an appraiser looking for? Let’s break this down.
The appraiser is looking for several basic things before really digging into your appraised value.
They determine the total land area your property is sitting on. If you have acreage, the home will be worth more in terms of property value than a home with a small yard.
They also confirm the actual property exists and whether you could viably live there. And they look for signs of damage that could be dangerous to occupants or materially affect the value of the home. As just one example, houses built prior to 1979 may have lead paint. If it’s peeling, the FHA and USDA both require that paint be replaced. The appraiser also checks that your furnace and air conditioner appear to be working.
The appraiser confirms the number of rooms in the home as well. For something to be counted as a bedroom, it has to include both windows and closets.
Basements and garages can add to the value of the property, but they aren’t included in the square footage of the home.
If you’re refinancing, an appraiser will take into account all reported upgrades after they verify them. There are a few important caveats here.
The upgrades must be permanent in order to add to the value of the home itself. In other words, nothing you could pick up and take with you is considered permanent. On the other hand, if your appliances are built in, that counts.
Basements may not count in the square footage, but they do count as upgraded if they’re finished and you can use the area as living space. This can add value to your home. Garages and pools are examples of other items that could be considered upgrades.
Finally, if you’re planning to do upgrades, make sure any projects are finished before the appraisal takes place. Having unfinished projects could detract from your home value.
An appraiser isn’t making their evaluation based on the cleanliness of your house. By no means does it have to look like a showroom floor. That said, impressions are everything. There are a few things to do that can spruce things up before they come in.
You don’t want to have obvious marks on the walls or holes, so you should work to patch the drywall and do any touchup painting that’s needed. As noted above, be sure to finish any last-minute renovations.
Giving Your Property a Value
Now that they’ve evaluated your home, how does an appraiser actually put a monetary value on your property? That’s an excellent question.
Let’s say you have a three-bedroom ranch with a recently renovated master bath. An appraiser will look for similar homes in your area. They’ll take the sales data from at least two or three other properties and use that data to give your home a value based on what the current market will bear.
At this point, one important note should be made on upgrades. Say your bathroom costs $25,000 to renovate. That may or may not actually result in a $25,000 increase in the value of your home. The appraiser has to see that the comparables sold for more money with their upgraded master bathrooms.
In other words, while it might be cool to build a moat with a drawbridge in front of your property, you may not want to be the first one to do it if you plan to recoup your investment in the short term. You may want to wait until a castle has been sold in the neighboring kingdom.
Those are the basics, but if you’re going to be refinancing or selling soon, you can find even more information on appraisals. Any questions for us? Leave them in the comments below.
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