Home Appraisal Report | Appraisal Meaning and Significance
What is a Real Estate Appraisal?
A real estate appraisal is a professional assessment of the value of a property. This evaluation is conducted by a licensed appraiser, hired by the bank or lender, who has expertise in determining the fair market value of homes or commercial spaces. The appraiser considers various factors, such as the property's location, size, condition, comparable sales in the area, and overall market trends.
The appraisal report is ordered by the lender, or bank. It’s a tool that helps protect the bank against the risk of lending money on an asset that is worth less. For example, a bank would typically not want to lend $500,000 for a property that is only worth $300,000. The appraisal report acts as a “check” to make sure the property is actually worth the amount of money being lent.
While an appraisal report is a good indication of the property value, it can sometimes be misunderstood. Individuals sometimes mistake the appraisal as an absolute measure of property value, but in a highly competitive market, demand can drive property value above what an appraisal report may consider. Example: a house receives 20 offers, with multiple buyers willing to stretch their budget to acquire the property. In this market, this property is worth what buyers are willing to pay, but it’s possible that an appraisal report would come in below that purchase price.
Significance in Real Estate Transactions:
Objective Property Valuation: An appraisal provides an unbiased and objective valuation of a property. This is crucial as it helps both buyers and sellers establish a fair and realistic price for the property. Lenders also rely on appraisals to ensure that the loan amount is commensurate with the property's actual value.
Influencing Financing Decisions: Lenders use appraisals to determine the maximum amount they are willing to lend for a property. If the appraisal comes in lower than the agreed-upon sale price, it can impact the financing options for the buyer. They may need to make up the difference or negotiate a lower purchase price.
Transaction Negotiations: Appraisals often play a role in negotiations between buyers and sellers. If the appraisal indicates a value lower than the proposed sale price, it provides grounds for renegotiation. Sellers might need to lower their asking price, or buyers may need to bring more money to the table.
Risk Mitigation: For lenders, appraisals serve as a risk mitigation tool. By ensuring that the property's value aligns with the loan amount, they reduce the risk of lending more than the property is worth. This is crucial in maintaining a stable and secure real estate market.
Legal and Ethical Standards: Appraisers follow specific legal and ethical standards when conducting their assessments. This ensures a level of professionalism and integrity in the process, contributing to the overall reliability of the real estate market.
In essence, a real estate appraisal is a safeguard that promotes transparency and fairness in property transactions. It serves as a critical tool for all parties involved, from buyers and sellers to lenders, providing an accurate and unbiased evaluation that forms the foundation of a successful and equitable real estate deal.
What Is an Appraisal Contingency?
An appraisal contingency is a clause that protects homebuyers. The appraisal contingency gives buyers the right to back out of (cancel) a real estate transaction if the appraisal value comes out below the purchase price. This is an important condition, because if the appraisal value is below the agreed purchase price, lenders may not be willing to lend the full amount to the buyer. For example, if you entered a contract to buy a home for $500,000 and you’re putting $50,000 down payment, your bank has agreed to lend you the remaining $450,000. If the appraisal report comes out and the property is only valued at $400,000, your lender may only be willing to lend you that $400,000 per the report, leaving a $50,000 gap to be filled—this is called an appraisal gap. In this scenario, the homebuyer has the option to make up this $50,000 shortage or cancel the transaction by exercising the appraisal contingency. In typical real estate transactions in California, appraisal contingencies are valid for 10-17 days, meaning the buyer has 10-17 days to obtain an appraisal report and back out, if necessary.
Waiving Appraisal Contingency
In competitive markets, many buyers have considered waiving the appraisal contingency. While this is generally not recommended and increases the risk for the buyer to be stuck in a deal, it can sometimes be necessary to make a strong offer. When you waive your appraisal contingency, it means that you cannot back out of the deal if the appraisal report comes out unfavorable.
This means you should have the cash to make up for any shortage or have a high enough down payment that the amount borrowed is still sufficient: for example, you put 50% down on a $500,000 home, meaning you need to borrow $250,000. The appraisal report comes out short with a value of $400,000. You are still OK in this scenario if you waive your appraisal contingency because you only need to borrow $250,000 and the low property value of $400,000 is still well above the amount borrowed.
How Long Does A Home Appraisal Take?
Depending on the size of the home and its features, a home appraisal can take anywhere from 1 - 2 hours typically. For smaller homes or condos, appraisals usually take an hour or less. For larger homes that have features like a pool, a detached garage, a large backyard, it could take longer for the appraiser to assess each feature and incorporate into their report.
