When purchasing a new home the appraisal is usually not the first thing that pops into your head. You’re busy dreaming about your potential in a new home and when the time to appraise comes around, you find yourself wondering, “What exactly is an appraisal?” and, “Why do I need one?” This article answers those two questions and covers all the basics you need to know about getting an appraisal.
So . . . what is an appraisal?
An appraisal is simply an educated assessment of the value of a property or piece of real estate. Purchasing property takes a lot of consideration. Someone you will need to be in contact with is a professional appraiser.
Why do I need to get one?
Appraisals are important because they allow you to borrow money from a bank to purchase your home. The lender is the one who hires the appraiser and the fee is reflected in the borrower’s closing costs. An appraisal tells the bank what the loan collateral will sell for, which helps them calculate a suitable loan amount. The appraiser is a third-party hire, not someone who works for the bank. You will want a professional appraiser working for you because they will make the most educated evaluation.
How does an appraisal work?
An appraisal does take place after you have purchased the home and signed the contract. This means that it is within everyone’s best interest if the appraisal is close to selling price. A licensed, experienced, and unbiased appraiser makes sure that the value of the property is fitting for what is being paid. The appraiser inspects the property by taking account of the location, features, surrounding area, and confirms that everything is in a reasonable condition. An appraisal can take 15 minutes or can prove to be longer if the property is difficult to measure or has special features. The appraiser documents everything by taking photographs, notes, and measurements.
There are three ways an estimate is formed:
Cost Approach – estimates the cost of improvements required (labor, building costs) in order to determine what it would cost to build a similar property. Location, amenities, and others are not be reflected in the cost approach.
Comparison Approach – this is where those other items are addressed. Appraisers are vastly familiar with the areas in which they work. They take into consideration local traffic, school zones, surrounding properties, and other factors. Also, an appraiser has knowledge of what interior features have a positive or negative affect on the property’s value. These could be things like hardwood floors, granite counter tops, fireplaces, extra rooms, square footage, etc.
Income Approach – this approach is generally used for commercial properties. It determines the value of the property based on its net income. This is not relevant for a typical residential property.
Do I need an appraisal if I’m selling my home?
A seller will hire an appraiser to get an assessment of their home’s value before listing it for sale. This will help them establish a good selling price. To prep your home for an appraisal you can do maintenance around the home, yard, and make improvements or upgrades. When the appraiser arrives you may want to accompany them in case they have questions.
Ready to order an appraisal?