If you’re looking to buy or sell a home, you should know what appraisal value is. Here’s why:
When a person is looking to get a loan on purchasing a house, the lender will usually check the home’s value based on recent sales in the area.
They send a real estate appraiser to calculate and estimate the value of the home. The amount they come up with is called an appraised or appraisal value.
The appraisal value is important because a lender/bank won’t give anybody a loan unless they’re sure the house can reasonably sell for that much again.
Why do they care if the house can sell for that much again?
In the case that the borrower/buyer cannot pay his or her mortgage payment, the bank has to take the house back. Then they have to sell the house and try to get back the money they loaned to the buyer.
Appraisal Value in Buying
If you are a buyer, your lender will only be able to lend the money to you if the purchase price of the home is reasonable compared to the appraised value.
- An appraisal value higher than the purchase price is usually no problem.
- But if the appraisal value is too low compared to the purchase price, you generally have a few main options:
- Pay a higher down payment to make up the difference between appraisal value and purchase price.
- Ask the seller to drop the price to match appraisal value (of course they can say no).
- Cancel the deal.
Because these are the major options, it’s usually advised for buyers only to offer based on what they can pay.
If your agent estimates beforehand that the home’s value is close to $200,000, and you choose to offer $220,000 to outbid other buyers, you should be prepared to pay for an extra $20,000 in down payment. Otherwise, it’s best to offer very close to estimated value to ensure you can actually get the loan and buy the home if you win.
To learn how a good agent estimates the value of a home, please visit this article:
Appraisal Value in Selling
If you are a seller, you should ask your agent to estimate how much your home should be able to sell for. Your agent should know how to calculate it. That estimated value will give you a good idea of what appraisal value will be close to.
To learn how a good agent estimates the value of a home, please visit this article:
The appraisal value matters to you because if you set the listing price much higher than appraisal value, most buyers using cannot qualify for a loan to buy it, even if they want to pay full price, and your house will sit on the market until someone is willing to pay that overpriced amount.
Usually people who have extra money and are able to cover the difference in appraisal value didn’t save that extra money by overpaying for things, so selling a severely overpriced home is fairly rare.
If you don’t want your house to sit on the market forever, I recommend you do not overprice it assuming anyone will just come along and pay for it. Most people using a loan won’t qualify to buy the home, and most cash buyers expect a discount.
Another analogy I like to use is the Kelly Blue Book example. If you have a Ford Fusion with 60,000 miles, most people can look up how much they would pay for it by seeing what everyone else paid on KBB. If it’s worth 10,000 and you’re trying to sell it for $12,000, most people will offer you around $10,000 and you’ll have a tough time selling it for $12,000. Information is available for everyone to see. If you’re trying to sell your house quickly, overpricing it above appraisal value is a surefire way to sabotage yourself.
How Appraisers get Appraisal Value
- What kind of home is this?
- An appraiser checks whether a home is a single family home, townhome, condominium, or multiple family dwelling.
- They also check the age of the home, building square footage, and land square footage.
- How much have similar homes sold for recently?
- After they determine the type of home, appraisers usually check the area for similar homes that have sold in the past 6 months.
- They use that data to help estimate the value of this home.
- What is the condition of this home?
- One other key factor is the condition of the home being appraised.
- If a home is in much better condition or has significant upgrades, that affects the appraised value.
- This list is not complete, but this is my personal summary of how appraisers go about determining the value of a home.
- For some more information on how appraisals work, please visit: https://en.wikipedia.org/wiki/Real_estate_appraisal
I hope this article helped you understand why appraisal value is important in buying or selling real estate.
For some more personal tips on buying, please read my article here:
For some tips on selling, please read this one:
To learn how a good agent estimates the value of a home, please visit this article:
I hope this article helped you understand why appraisal value is important whether you’re buying or selling!
Please have a great day 🙂