What Is a Home Appraisal? A Simple Guide for Home Buyers
What Is a Home Appraisal?
If you're buying a home, you've probably heard the word appraisal thrown around.
But what exactly is it?
Simply put, a home appraisal is an independent opinion of a property's market value, typically prepared by a licensed or certified appraiser.
When you're getting a mortgage, your lender may require an appraisal to help determine whether the home you're buying is worth the amount they're lending.
Think of it this way:
The inspection looks at the condition of the house.
The appraisal looks at the value of the house.
They're two very different things, and both can be important when you're buying a home.
Why Does a Lender Require an Appraisal?
Your lender is lending you a significant amount of money.
The home you're purchasing serves as collateral for that loan. So the lender wants to make sure the property's value reasonably supports the amount being borrowed.
For example, let's say you agree to buy a home for $500,000. If the appraisal comes in around $500,000, everything may move forward as expected. But what if the appraisal comes in at $480,000?
That's when you may need to have a conversation about your options.
How Is a Home Appraisal Done?
The appraiser will evaluate the property and consider factors that can influence its market value.
These can include:
- Location
- Size of the home
- Number of bedrooms and bathrooms
- Lot size
- Age and condition
- Improvements and renovations
- Quality of construction
- Garage and other features
- Comparable recent sales
- Current market conditions
- Location-specific factors
The appraiser will generally compare the property to similar homes that have recently sold.
These comparable properties are often called "comps."
This is one reason local market knowledge matters.
A home in West Jordan isn't necessarily going to be valued the same way as a similar-sized home in another part of the Salt Lake Valley.
What Is the Difference Between an Appraisal and a Home Inspection?
This is one of the most common questions I hear from buyers.
Home Inspection = Condition
A home inspector is looking at the condition of the property and its major components.
They're looking for things that may need repair, maintenance or further evaluation.
Appraisal = Value
An appraiser is primarily determining an opinion of the property's market value.
They're looking at the property, comparable sales and other factors that influence value.
You can have a house that is in excellent condition but doesn't appraise for the purchase price.
And you can have a house that appraises at the purchase price but still has items that need repair.
That's why an appraisal and inspection serve two completely different purposes.
What Happens If the Home Appraises at the Purchase Price?
Great!
If you're buying the home for $500,000 and the appraisal supports a value of $500,000, your transaction can generally continue toward closing, assuming all other contract and loan requirements are satisfied.
Your lender will continue working through the mortgage process.
What Happens If the Home Appraises for Less Than the Purchase Price?
This is where things can get a little more complicated.
Let's say you offered $500,000, but the appraisal comes back at $480,000.
That doesn't automatically mean the deal is dead.
There may be several options depending on your contract, financing and the circumstances of the transaction.
Potential options could include:
- The seller reducing the purchase price
- The buyer bringing additional funds to closing
- The buyer and seller negotiating another solution
- Challenging or reconsidering the appraisal, when appropriate
- Walking away from the transaction if the contract allows it
Don't panic.
If an appraisal comes in lower than the purchase price, the first thing to do is understand why and talk with your Realtor and lender about your options.
Can an Appraisal Be Wrong?
Appraisals are professional opinions of value, but they aren't an exact science.
Two qualified professionals can sometimes reach different conclusions about a property's value.
That's because determining market value involves judgment, comparable sales and interpretation of the available information.
If you believe an appraisal contains factual errors or important information wasn't considered, your lender may be able to discuss the appropriate process for requesting a review or reconsideration.
Does the Seller Get a Copy of the Appraisal?
The appraisal is generally part of the mortgage process and is ordered for the lender's purposes.
Your lender can explain who receives the report and how it will be provided to you.
If you're the buyer, it's a good idea to ask your lender about the appraisal process early so you know what to expect.
Does a Home Appraisal Guarantee the House Is in Good Condition?
No.
This is important.
An appraisal is not a home inspection.
An appraiser isn't performing the same type of detailed inspection that a professional home inspector performs.
A property can appraise at its purchase price and still have maintenance issues or repairs that need attention.
That's why I recommend thinking of these as two separate questions:
"What is this home worth?"
and
"What condition is this home in?"
The appraisal helps answer the first question.
The inspection helps answer the second.
When Does the Appraisal Happen?
For a financed purchase, the appraisal generally happens after you're under contract and while your lender is processing the loan.
The timing can vary depending on the lender, appraiser, property and transaction.
Your lender will coordinate the appraisal and can tell you when it has been ordered and completed.
What If You're Paying Cash?
If you're buying a home without a mortgage, an appraisal may not be required by a lender.
However, a buyer may still choose to obtain an appraisal if they want an independent opinion of the property's value.
Whether that's worthwhile depends on the property and the buyer's circumstances.
What Does an Appraisal Mean for Sellers?
If you're selling your Salt Lake City home, the appraisal can be an important part of the transaction when your buyer is financing the purchase.
This is another reason pricing a home correctly from the beginning matters.
As a seller, you don't want to simply look at an automated online estimate and pick a number.
I look at recent comparable sales, current competition, condition, improvements, buyer activity and what's happening in the specific neighborhood when helping determine a pricing strategy.
The goal is to position the property realistically in the current market.
The Bottom Line: Appraisal vs. Inspection
Here's the easiest way to remember it:
Appraisal = What is the home worth?
Inspection = What condition is the home in?
They're both important, but they're looking at the home from completely different perspectives.
If you're buying your first home, don't worry if all of this sounds like a foreign language.
That's part of my job.
I'll explain what's happening, answer your questions and help you understand what your options are along the way.
Buying a Home in Salt Lake City?
Whether you're a first-time home buyer or you've purchased several homes before, having someone in your corner who understands the process can make a big difference.
If you're buying or selling a home in Salt Lake City, West Jordan, South Jordan or throughout Salt Lake County, I'm happy to help you navigate the process.
No pressure. No complicated real estate talk.
Just honest information so you can make a decision that's right for you.
Nancy Bergman | Your Neighborhood Realtor
Salt Lake Home Pros | Homes International