There are key things to know about real estate appraisals which will help both buyer and seller better understand the process. Appraisers analyze and report real estate data. They render an impartial, third party opinion of the market value of a home. They do not represent the home buyer, they represent the interest of the buyer’s lender. While the home buyer pays their lender an appraisal fee, the lender hires and pays the appraiser. The lender, not the home buyer, is the appraiser’s client. Read further … Key things to know about real estate appraisals
Appraisals For Mortgage Loans
Lenders need assurance that money advanced to a buyer is secured by real estate worth at least that amount. Should foreclosure be required, the lender has to be protected. Appraisers work for the lender; they have no interest in either the buyer or the seller. The appraiser is objective and impartial; they complete the appraisal to underwriting standards. They use comparable closed sales and review current listings, pending sales and market trends to develop their opinion of value. Appraisers do not “set prices and make the market”, they simply report the data within the parameters dictated by underwriting standards.
Appraised Value Doesn’t Always Equal Sale Price
There are many reasons to get an appraisal, most are to get an idea of potential market value. Appraised value is not necessarily the price a property will contract for. A home is worth what a buyer is willing to pay when the home is listed for sale. Consider the variables with every sale; buyer and seller circumstances, economy, time of year, interest rates, agents involved and wild cards like pandemics, civil unrest and elections. A home with great lot, great schools, pool and a full in-law apartment may appraise for $500K, be listed and sell in days for $550K. The “value in use” for that particular buyer can explain the increase. That home may be perfectly located or ideally fit the buyer requirements.
Appraisers are a key part of every transaction involving a lender, even with some cash deals. Despite their importance, many don’t fully understand their role. The appraiser’s role is simple; to work within underwriting standards and provide an impartial opinion of value.
Conversely, that home may sit; perhaps something changed in the local area since the date of appraisal and list date. Rates may have jumped, the local market may have shifted or other dynamics changed. That $500K appraisal is nice but the home ultimately sells months later for $440K. Real estate is constantly shifting; no market is static.
Do Homes Appraise Over Purchase Price?
The appraiser objectively completes the appraisal to underwriting standards. If the data supports the idea that a buyer secured an exceptional deal, it’s possible the appraisal will be above contract price. However, it’s logical to think that if the home was worth more, the market would recognize that with multiple offers. Of course there are variables, mainly exposure to the market. Was the home in the MLS and widely exposed? Was it marketed outside of the MLS, by the owner or word of mouth? How many potential buyers saw it? The greater the exposure, the greater the competition and the more likely the market price will be reflected.
Why Does a Home Appraise For Less Than Purchase Price?
No appraiser desires to “kill” a deal but on occasion, data doesn’t support the contract price. The first inclination is to challenge the appraisal; understandable but often a long shot. The market (buyers) ultimately decides what a home is “worth”; that price which someone is willing to pay. If a home is a “perfect” fit for a buyer (value in use) or there’s a very short period to buy (like relocation) they may be willing to pay more than the market may bear. Low inventory may spur a buyer to “not miss this one” and they pay what’s needed to secure a deal. Appraisers, while able to appreciate that, are bound to follow strict underwriting guidelines. If comparable data cannot be found to support the contract, the appraisal may come in below sale price. There are ways to move forward if the appraisal comes in low.
Key things to know about real estate appraisals – The internet is inundated with different methods to estimate the value of a home. The only true indicator is offering it to the market, the buyers will have the final word. Appraisers play a key role – an impartial one – but critical none the less. Like agents, inspectors, surveyors and a number of others, successfully closing a transaction requires understanding and cooperation between a number of people – including the buyer and seller.