During the home buying and selling process, there are several moments of truth- times where buyers, sellers, agents and lenders alike hold their breaths, cross their fingers, and hope for the best. One of these moments is the day of the appraisal.
So why all the fuss? What is an appraisal all about?
Appraisals are an important part of the lending process for the buyers. The lender hires an appraiser to estimate the true value of a property so they can make an informed decision when providing loans. The appraiser uses sales of comparable homes in the area, along with a physical inspection of the house and neighborhood, to deduce market value.
The reason appraisals are tricky is that sometimes buyers are willing to pay more for a home than the home would appraise for. Market value is not always the same as the appraised value. Real estate appraisers use cold hard facts to determine the appraisal value. Consumers, who dictate market value, use many of the same facts but add an additional emotional element that can result in a different dollar amount. A home may be so perfect for a specific buyer, that he or she is willing to pay over the list price and appraised value to get the home. Whatever a buyer is willing to pay for home is the home’s “market value”. In the end a home is only worth what a buyer is willing to pay for it.
So what happens when a home is appraised below market value?
A lender will only finance a home purchase up to the appraised value. For instance: a home is listed for $300K, a buyer says he or she will pay $290K, and the appraisal comes in at $280K, the bank will only provide a loan up to $280K. The seller either must lower their price or the buyer must bring cash to cover the difference. If neither of those things can happen, the deal will probably fall through.
So as a buyer, what can you do to make sure the home you’re offering on appraises at the price you want it to?
First and foremost, when hiring a lender, make sure to ask them where their appraisers come from. In places like Boulder, that is especially important because the market value of properties is higher than in other nearby cities. If you have an appraiser come from Denver, they may appraise the home lower because they are unfamiliar with the local market.
Secondly, ask your real estate agent to provide information to the appraiser on comparable properties in the area. The appraiser will come with their own comparable properties they have researched. By providing them the list of homes that helped you determine the sales price, you are showing them why your price is reasonable. Also, if you home has something that makes it truly unique, make sure the appraiser knows that, as well. By making sure they have all the info they need, you can be sure they will be the most accurate judge of the value of your home.
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