What is an appraisal and why is one necessary after an agreement of Purchase and Sale is signed?

Whether you’re buying a home using a mortgage, refinancing your existing mortgage, or selling your home to anyone other than an all-cash buyer, a home appraisal is a key component of the transaction. If you’re a buyer, owner, or seller, you’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.

An appraisal is an unbiased professional opinion of the value of a home and is used whenever a mortgage is involved in the buying, refinancing, or selling of that property. IT is used to determine whether the home's contract price is appropriate given the home's condition, location, and features If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, the transaction can be delayed or even canceled. ?

Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.

The Appraisal Process and How Values Are Determined

Because the appraisal primarily protects the lender's interests, the lender will usually order the appraisal. An appraisal costs several hundred dollars and, generally, the borrower pays this fee. ?

A property's appraisal value is influenced by recent sales of similar properties and by current market trends. A qualified appraiser creates a report based on a visual inspection, using recent sales of similar properties, current market trends, and aspects of the home (e.g., amenities, number of bedrooms, bathrooms, floor plan, functionality and square footage) to determine the property’s appraisal value. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property's value, such as needed repairs.

The appraisal report usually includes:

• A street map showing the appraised property and comparable sales used
• An exterior building sketches
• An explanation of how the square footage was calculated
• Photographs of the home’s front, back, and street scene
• Front exterior photographs of each comparable property used
• Other pertinent information—such as market sales data, public land records, and public tax records—that the appraiser requires to determine the property's fair market value

What happens if the appraisal come in lower than the agreed sale price?

Chances are, neither the buyer nor the seller wants the transaction to fall through. As the buyer, you have an advantage, in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price. The bank won't lend you or any other prospective buyer more than the home is worth.  You can pay the difference however, if you so choose.

As a seller, a low appraisal, if accurate, means you may have to lower your home’s price to get it sold. Holding out for an all-cash buyer who doesn't require an appraisal as a condition of completing the transaction is unlikely to net you a higher sales price. No one wants to overpay for a home.

The Bottom Line

When everything goes smoothly, the home appraisal is just another step in the sale process.