The Real Estate Home Appraisal
What is an appraisal? Why get a home appraisal? What does an appraisal do? Should you get an appraisal? Are you required to get an appraisal? Does the appraisal take the place of a home inspection? How much does the average appraisal cost?
An appraisal is an opinion of the value of a property at a specific moment in time. An opinion today may be outdated 6 months from now. This opinion is made by a professional real estate appraiser that is usually familiar with the geographic location that the property is located in. The purpose of the appraisal is to verify the value of the house so that it substantiates the price of the house.
A home appraisal is generally obtained by the buyer of a property who is getting financing for a house. This buyer generally does not have the financial means to pay cash for the property so they are asking a financial institution to give them a loan for the amount of the purchase price.
An appraisal is optional if you're paying cash for the property, but is still a good idea to order an appraisal if there is any doubt whatsoever about the properties value. If you are financing the property, banks usually require appraisals. The reason banks require the property to be appraised is because the bank wants to make sure that the property is worth equal to the amount that they are loaning to the buyer for a property.
For example, lets say a buyer finds a house that is suitable, and they agree with the seller to sell the house for $150,000. The buyer orders an appraisal. The appraiser appraises the property at only $100,000. In this situation, the bank would only lend to the buyer $100,000, the equivalent of the value of the property. More is explained later on in this article about the course of action in the event of an underappraisal.
Banks require appraisals because they want to make sure that they are not going to lend more money that what a property is worth. If the buyer purchases a property that was worth less than the purchase price and then defaults on the loan, then the house would go into foreclosure. The bank would then foreclose on the property for sale, hoping to recoup back the amount loaned for the property. Undervalued properties that are sold at property auctions would mean that the bank would lose the excess amount over the true value of the real estate involved.
The bank generally orders the appraisal themselves using a trusted appraiser of their choice. In Louisiana, as in most states, the buyer pays for the cost of the appraisal. Regardless of if the deal goes through, the buyer will not be refunded the amount paid for the appraisal. An appraisal generally costs $350-$450 or so to have an appraisal done on a house. This non-refundable cost is an important consideration for buyers who have limited funding, such as first-time homebuyers. Having a knowledgeable real estate agent in the particular area that a buyer buys is critical, as a knowledgeable agent will already have an idea of the value of the property even before negotiations on price ever start to surface. By having a buyers agent, a buyer can increase the likelihood of not entering into a real estate contract to purchase a property with a purchase price that is above the value of the property, thereby saving the buyer the costs they would have incurred had they ordered the appraisal without knowledge of the value of the property.
Nonetheless, while an agent's expert advice is helpful into ascertaining the price of the house in the current market, appraisers are crucial in that they give a buyer an objective third-party verification of the price. The appraiser is paid for coming up with the value of a property. Whether or not the sale goes through, the appraiser gets paid for appraising a property.
Appraisers appraise a property by researching the past sales of similar homes to come up with the value of a home. Generally, appraisers research extends back 3 months from the current date. Appraisers like to have 2 to 3 similar houses that they can use to compare to the property that is being appraised. These similar houses are known as comparibles. Comparables are comparable, or similar, to the subject property being appraised. This is similar to the Comparative Market Analysis (also known as CMA or C.M.A.) that a real estate agent does for sellers when they want to see how much their house is prior to listing a property.
When the appraisal is done by the appraiser the buyer will receive a stack of papers about 1/4 of an inch thick that detail the appraiser's findings. It will tell the buyer how much the house is valued in the appraiser's own opinion. The appraiser will also explain how he came up with the price, and will give you details on both your house and the comparative properties that he used. Appraislas generally include pictures of the property as well.
Below explains the real estate process after the appraisal is performed.
- If the appraisal for the house comes in higher then the purchase price and terms remain the same.
- If the appraisal comes in at the same value of the purchase price then nothing changes either and the deal moves forward.
- If the appraisal comes in lower than what the buyer is purchasing the house for then the buyer has a decision to make. Do I still want the house for the price I originally agreed upon?
- If the buyer does then the buyer can pay the higher amount in cash and move on in the buying process.
- If the buyer doesn't want to pay the over-appraisal price then the buyer's agent will then notify the selling agent of the under-appraisal. At this point, the seller then has several options, none of which are considered a breach of contract.
- The first option the seller has is the option to lower the original agreed on purchase price amount to the appraised value.
- Another option the seller has is to not lower the purchase price at all.
- The third option, is to meet the buyer somewhere in between.
- If the seller doesn't want to budge on the price, then the buyer can cancel the contract and get their deposit back in full.
- If the seller wants to meet the buyer somewhere in between the appraisal price and the original price then the buyer can either accept the new purchase price or cancel the purchase altogether. In the case of moving forward with the purchase, it is important to note that if the buyer is obtaining a loan, any amount over the appraised value will not be financed. In this case, the buyer would have to pay in cash the difference of the agreed upon purchase price and the appraised value.
- And of course, if the seller agrees to lower the original price to the appraisal price, then the buyer must proceed with the sale.
In addition, there is a term called BPO or a Broker's Price Opinion. A B.P.O. is generally used in short sales, which are becoming more common in today's world. A BPO is very similar to a CMA, however it is done by a real estate broker. BPO's are not performed by appraisers. Banks generally are the parties who order a BPO because BPO's cost less than a full appraisal done by a licensed real estate appraiser.
In conclusion, the appraisal process is pretty simple for the average buyer who is financing a property as banks will require one to be performed. A skilled real estate agent is essential for buyers to have, as they can prevent buyer's from overvaluing a property, which could lead to not only the lost appraisal fee but lost time in negotiating a contract for a property that they could never get financed in the first place. Appraisals are very important for buyers to get, as prices of properties go up and down according to market conditions. Not ordering an appraisal for a property can cost a lot of money for the buyer. The appraisal clause in Louisiana's real estate purchase agreements are meant to protect both banks and real estate buyers in a real estate transaction.
