Home Appraisals: Buyer & Seller Basics

Determining an asking price as a seller, and an offer price as a buyer, are two of the most stressful decisions in the home sales process. As a seller, listing too high could keep your house on the market for far longer than you’d like, while listing too low could keep you from getting the true value of your home.

For buyers, offering the asking price without doing any research might be digging too far into your wallet, while offering too low of a price could get you downright refused.

But you don’t have to figure out the finances on your own. In fact, sellers often invest in a home appraisal to get an idea of a sale price, while banks generally require buyers to get them done before the deal is finalized.

But what exactly are appraisals, how do they work, and how can they affect your deal? We’ll cover that and more below.

Do I Need a Home Appraisal?

Sellers

Sellers can use home appraisals to determine a fair selling price for their home and to find out whether or not there’s anything they can do to increase the value. Sellers who get appraisals prior to listing their homes are often better equipped for negotiations, and they also have a general idea of what to expect from a buyer’s appraiser.

Buyers

Buyers who are financing a home will generally be required to have an appraisal done by the lender. While a home inspection tells you what may be wrong with the home and if it is structurally sound, an appraisal gives you more financial insight into what the home is worth, and whether or not your offer is reasonable.

Homeowners

Homeowners who wish to refinance their homes because of renovations, upgrades, or just to take advantage of a lower interest rate may be required by the bank to have an appraisal done. This can be a benefit if upgrades to the home increased the value or affected the effective age of your home.

What is in a Home Appraisal?

A home appraiser will provide a report to you once the appraisal is complete. Aside from giving you an estimated value for your home, they will also provide details about how they calculated that amount, and what affected the value. Generally, a full report includes:

• An explanation of how the appraiser determined the value
• Specifications about the size and condition of the home
• A list of improvements that have been done, and when
• Details of any structural problems
• A short market evaluation, including current trends
• Any relevant notes about the area or property

Some appraisal reports may also include pictures, maps, sketches, or information about comparative trends in the market.

To determine some of these inclusions, the appraiser may ask you, the home owner, questions about the property. It’s best to answer these questions honestly so that they can determine a reasonable value for your home.

When choosing an appraiser, try to choose someone:

• Who has experience pricing homes in your area
• Who has certification to complete residential appraisals
• Who has experience in residential appraisals

Buyers and sellers should have different appraisers. They may even want to have more than one appraisal done to determine a more specific price.

Why do I Need a Home Appraisal?

Home appraisals keep sellers from losing money and from unpleasant surprises down the road. It’s better to find out what your home’s value is before listing it so that you have a realistic view of what it will sell for, and what you might need to do to increase the value.

For buyers, home appraisals keep them from paying too much for the home, which is especially important for home buyers who have little to no experience in residential real estate. Instead of purchasing an overvalued home and being stuck with the bill, a home appraisal gives the buyer an opportunity to back out before the sale is finalized.

Banks also benefit from home appraisals because they keep them from lending more money on a property than is necessary. Since banks technically own the property until it is paid, they really don’t want to have collateral that is worth far less than what was borrowed for it. That’s why banks will typically refuse to approve mortgages on homes where the offer price is much more than the appraisal value.

What Affects a Home Appraisal?

There are many different things that can affect the value of your home. They depend on how your home will be evaluated, since there are typically two types of appraisals.

A sales comparison appraisal is when a home appraiser takes into account the lot size, style, age, and square footage of the home and compares it to 3 or 4 similar properties in your area.

A cost approach is generally used for new properties and is determined based on the reproduction cost of the home and the value of the land.

A home appraiser doesn’t typically consider esthetic appearance or cleanliness into account when valuing your home. They do consider:

• Recent upgrades
• Comparable sales
• The neighborhood and area
• The land the home in on
• Whether any major repairs need to be done, or if there is structural damage
• Assets, such as parking in urban areas, garages or sheds, land, etc.

Sometimes, the value of the home can be affected by federal guidelines, or a lack of comparable homes in the area. If an appraiser is inexperienced or hasn’t valued homes in your region before, they may not be familiar with the values specific to your home.

Foreclosures and a lack of similar sales in the area can also affect the appraisal amount, as well as the current market trends, so it’s important to understand how your asking or offer price may be influenced.

Any surprisingly low or high appraisal should be questioned. As mentioned above, an appraiser will provide a report detailing how they reached their conclusion, but you can always ask them to expand on their reports by providing you with more explanation.

If you are unsatisfied with a report, and the answers that an appraiser gives you, you can always have a second or third appraisal done. Your mortgage broker, bank, or realtor will usually have trusted contacts that they can forward to you.

Using a Home Appraisal to Your Advantage

Sellers can use home appraisals to accurately select an asking price for their home, instead of using guesswork or having unrealistic expectations about its value. By having your own appraisal done, you can be confident that you’ll know what to expect when the potential buyer has an appraisal of their own conducted.

As a buyer, you can be sure to pay for the value of the home, and not the value perceived by a potentially biased seller. It may even just confirm that the offer price was correct and that the home has been valued properly.

Home appraisals are an important tool in the home sale process for all parties involved. They help to provide deeper insight into the worth of a home, which can give everyone involved an opportunity to understand the value and process of purchasing or selling residential real estate.

Has a home appraisal ever surprised you? Were you a seller or a buyer?