First, there seems to be a lot of confusion on the role of an inspector and an appraiser. Let’s cover this first difference first, and then move to everything you need to know about the appraisal process.
When you purchase a home with a loan, the lender will order an appraisal of the home to document its current market value. An appraiser will, tour the home to compare their site evaluation to the collected data they have on the home. The appraiser will also note any update, upgrades, any deficiencies, and finally measure the home for square footage accuracy. Unlike an inspector who is hired by the buyer to inspect the integrity, the condition, and evaluate the systems of the home and how they function, and then relay this information to the buyer to evaluate if they still want to move forward with the purchase of the home. The appraiser’s sole purpose is to protect the lender’s monetary investment in the home. The lender wants to verify the buyer isn’t overpaying the value of the home, so if the buyer ever defaults on the loan in the future, the lender can foreclose on the home and recover its investment.
To determine the home’s value, the lender’s appraiser will compare properties similar to the home you are purchasing, that have recently sold in the neighborhood. These similar homes are called comparables, or “comps” for short. In addition to comps, the appraiser will also consider a wide range of specific details of the home, such as the current condition, the age of the home, any updates and upgrades completed, square footage, bedroom and bathroom count, etc. to determine its value. Once the value has been determined, the lender will call you with a verbal assessed value, then will send you a copy of the appraisal
Here are the 4 main components of an appraisal:
#1 A Walk-Through (Or Drive-By)
The bank’s appraiser will walk through the entire house to get an idea of the overall condition. They’ll also confirm the tax records and note any upgrades done to the home.
#2 Home Details
After the appraiser completes the walkthrough, they’ll compile all the details of the house into their appraisal software. They’ll enter important details like square footage, room count, bathroom count, and measurements.
#3 – Comparables
The appraiser will find comparable homes that have sold recently in the area. They’ll note all of the similarities to your home and include pictures from the MLS.
#4 – The Evaluation
The most important part of the appraisal is the evaluation. This evaluation is the amount that the appraiser deems the home is worth. This dollar amount will be sent to the lender and the buyer so all parties know the value they have given the home.
If the appraisal comes back higher than the agreed-upon price, the buyer will have peace of mind that they aren’t overpaying for the home and the have some instant equity in their purchase.
On the contrary, if the appraisal comes back lower than the agreed-upon price, then the buyer may feel like they’re the ones getting the raw end of the deal – and demand that the seller lowers the price – which means less money in the seller’s pocket.
The ideal scenario is to agree on a price that aligns with the home’s fair market value, so it’s a win-win for both parties involved. This is why it’s so important to have a great real estate agent on your side. A good Realtor® can price the home correctly, to begin with, and communicate the value to the appraiser throughout the appraisal process.