What's a Home Appraisal and Why Is It Important?
Do you know what a home appraisal is and how it affects the buying and selling process?
You’ve found your happy place and now it’s time to cross all your T's and dot all your I's before it’s all your own. One of the first items on your closing checklist is the home appraisal. On the reverse side, home sellers also need to understand the home appraisal as it affects the sales price of a home. So, what exactly is a home appraisal?
The home appraisal is essentially a value assessment of your hpapy place (the home and property). It is conducted by a certified third party and is used to determine whether it is priced appropriately.
During a home appraisal, the appraiser conducts a complete visual inspection of the interior and exterior of the property. He or she factors in a variety of things, including the home’s floor plan functionality, condition, location, school district, fixtures, lot size, and more. An upward adjustment is generally made if the home has a deck, a view, or a large yard. The appraiser will also compare the home to several similar homes that were sold within the last six months in the area. These are often called comparables or 'comps' for short.
The final report must include a street map showing the property and the comps, photographs of the interior and exterior, an explanation on how the square footage was calculated, market sales data, public land records, and other items.
After it is complete, the lender uses the information in the report to ensure that the property is worth the amount they are investing in your loan. This is a safe-guard for the lender since the home acts as collateral for the mortgage. If the buyer defaults on the mortgage and goes into foreclosure, the lender generally sells the home to recover the money that was borrowed to finance it.
We've seen an interesting market lately with offers coming in over asking price and some even include 'appraisal gap' clauses. What happens when a house doesn't appraise as high as the contract price if you included an "appraisal gap" clause in your contract? Well, the appraised value is the amount the lender will give the borrower so the borrower will be responsible for making up the difference in cash. Ideally, without an "appraisal gap" clause, sellers can choose to lower the sales price to match the appraised value and in others the deal is dead. A contract that has an 'appraisal gap' clause in it generally means that the borrower understands it might not appraise as high as the offer and they are guaranteeing to pay a certain amount over the appraised value. It is a strategy that is winning in multiple offer situations, but can be risky if the borrower doesn't have enough cash to cover their down payment, closing costs and the "appraisal gap". It's very important to communicate with a trusted professional in order to help you navigate situations like these, particularly in such an interesting market. I'm happy to help you through the home buying or selling process and answer any questions you may have. Feel free to contact me.