Appraisal What Is It Why Does It Matter

Dated: 03/18/2019

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Appraisal: What is it? Why does it matter?


A common quesiton we hear is "Just exactly what is an appraisal and why does everyone make such a big deal about the apprasial

 

An appraisal is an expert estimate of the value of something.  Speaking specifically to the real estate world, an appraisal is the written estimate of a property’s market value. The value is determined by a multitude of factors, the most common being recent sales in the area of similar properties, amenities, and the property’s physical condition.
 

Who does the Appraising?

 

one orange man with a hat.pngThe appraiser is the professional estimator, generally contracted by the bank or lender to determine the market value of the property.  The appraiser is protecting the interest of the l
ender.  If a buyer is willing to overpay for a property, of course the seller will accept the offer.  However, the bank will not lend against a house that will not sell for what they loaned on.  The appraiser protects the bank by double checking the property value, that the deal will be a wise investment for the bank in the long run.

 

There are many people involved in a real estate transaction, read our article Meet the Players to understand each person's role. 

 

What happens at the Appraisal?

 

To conduct the formal appraisal process, the appraiser physically visits the property, conducts an extensive walk through, takes pictures and notes to assist him/her come to the final value recommendation.  They will be looking at the layout, property 
condition, and details that may influence property value, both favorably and unfavorably.  After visiting the property, the appraiser will research neighborhood growth and trends, recent comparable sales, and general market trends to make final determination.


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The final value is written in a comprehensive report, outlining all factors contributing to the appraiser's opinion of value. Both buyers & sellers are able to receive a copy of the appraisal upon request.

Why is the Appraisal Important?

 

The appraisal is important for one obvious reason.  If the house does not appraise for the mutually accepted contract price, the deal could easily fall apart.  This is referred to as an under appraisal. Typically, the seller does not want to drop their price and the buyer does not want to overpay for the property.   

 

There are only a few options at this point:  

 

  • The seller can drop their price to the appraised amount (usually what the buyer wants) or

 

  • The buyer can “pay the difference” meaning, pay the amount needed to make the bank comfortable with the loan to value ratio (usually what the seller wants) or

 

  • The seller can challenge the appraisal and hire a private appraiser to conduct another review, this can assist the seller establish value, however, it's up to the lender which appraisal to use or

 

  • The buyer can back out with their financing contingency and the deal falls apart.

 

Conclusion

 

As outlined in Anatomy of A Real Estate Transaction by the time the appraisal comes around, both the seller and the buyer are pretty committed to the transaction going through.  In general, it is best to avoid an under appraisal by working with a local and knowledgeable real estate team that will estimate the property value before making an offer, this will ensure the property’s value is in line with what the appraiser will determine, the buyer is making a wise financial decision and the seller will experience a smooth transaction.

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Marco Murad

Off Market Specialist. Specialties: Buyer's Agent, Listing Agent, Relocation, Commercial R.E. I'm a real estate consultant who's made a career of an excellent track record of outstanding results an....

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