Appraising the Property

Appraising the property is yet another integral step in the home buying process. An appraisal determines the market value of a home. The lender will require an appraisal prior to officially approving any loan. Therefore, the lender will be very proactive about ordering the appraisal early on in the loan process. In fact, you will usually pay for the appraisal up front applying for a loan. 

Unlike a home inspection, the buyer is not present for the appraisal and will probably not have any contact with the appraiser. Appraisals are most notably done through an appraisal management company. This ensures that they are a third party to the transaction and will give a fair estimate of the value of the home. The appraiser provides information that helps the buyer avoid overpaying for the property, but their real job is protecting the lender. The lender will take a good look at the appraisal to decide if the property is adequate security for the loan they are about to fund.

The appraiser will compare the home in question to other homes in the area. There are a couple methods the appraiser may use to conduct their analysis of the property:

1. The first method is a sales comparison.
   • In this case the appraiser will compare other properties of similar nature that have sold in the same area. The appraiser will take into account nearby schools, parks, size of the lot, and condition of the home.
2. Another method is the cost approach
   • This would be best suited with new homes where the building costs are known. The appraiser assesses how much it would cost to rebuild the home if it was destroyed.

When the appraisal report comes back it will detail any major problems, but is not all inclusive like a home inspection. The appraisal report will let you know how much the appraiser finds the property to be worth. If the appraisal of the property comes in lower than the sale price, the lender will probably deny the loan. This is because the lender does not want to fund a loan that is considerably more than the property is worth. However, the game is not over! There are certain measures that may be taken in order to acquire the loan:

• The seller agrees to reduce the price
•  The buyer is able to make a reasonable down payment, therefore not borrowing as much from the lender
• Repairs can be made to increase the value of the home

These actions will increase your chances of getting approved for the loan.

After the appraisal comes in you are ready to move through the rest of the home buying process! If you have any tips or stories about what happened with your appraisal, please feel free to share below!