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Understanding the Home Appraisal Report

| Home Buyer Guidance

In the process of buying or selling a home, you may hear some strange and vaguely familiar terms. One of these terms is the “real estate appraisal report.” This is a written report that estimates the current fair market value of the property that you are buying or selling.

What Information Determines the Report?

The price given in the appraisal is determined by several factors:

  • Recent sales of similar properties in the area
  • Current condition of the property
  • The neighborhood and its impact on future value

These terms are just vague enough to be difficult for many buyers and sellers to understand.

Recent Sales

An appraiser will review the records of nearby properties sold from the last few weeks or months to find three or four that are similar in size, style and layout. The selling prices of those homes will help determine the value of the home being appraised. Many buyers and sellers want to know how recently the comparable homes were sold, and what is defined as “within the same area.”

The parameters vary between homes in a metropolitan area and in a rural community. In a larger city, the appraiser could find similar homes that sold in the last month and within one mile of the home that is for sale. In a small town or rural community, that appraiser may have to consider sales over several months or widen the perimeter to encompass the entire town or several miles.

Current Condition

An appraiser must evaluate the current condition of the selling property to determine its value. He or she will inspect the home for any health and safety issues. Any violations or risks will be noted in the final report. These may include old wiring, a lack of railing along stairs and many other conditions. In addition, the appraiser will evaluate the overall design of the home. Is it comparable to others in the neighborhood or is it above or below them? A home that needs serious updating will have a lower appraisal value than one that has recently been renovated.

The Neighborhood

The surrounding neighborhood also plays a part in the appraisal. The appraiser must determine the current state of the neighborhood and where it is headed in the future. For instance, a home in a new or up-and-coming subdivision will have a higher value today, because it is expected to increase in the future. On the other hand, a home in a tired-looking neighborhood that is declining instead of growing doesn’t have the same potential for value.

Getting an Appraisal

The lender must request an appraisal by a licensed appraiser.  All appraisers are bound by the Home Valuation Code of Conduct to give an unbiased, professional appraisal. The seller and buyer cannot be involved in this portion of the process. The lender will then determine the loan amount based on either the sales price or appraisal value, whichever is lower. If the appraised amount is less than the asking price, three things can happen:

  1. The seller reduces the price to match the appraisal.
  2. The buyer brings cash to the closing table to pay the difference.
  3. The buyer walks away from purchasing the home.

Adjustments

Adjustments are changes made to the value based on differences between the home being appraised and other recent sales. For example, if most homes in the area have pools and one doesn’t, the value will be adjusted by the expected added value of a pool.

Sellers can ensure that their homes have the most value by fixing things in need of repair and making any necessary updates. With the right renovations and repairs, they can get more money out of their homes. Although buyers do not have any input on an appraisal, it is still important that they understand the process and how it impacts their loan.

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