The How and Why of Home Appraisals

 

There's no question that the housing market this year has been upended. Low inventory and high demand have created bidding wars the likes of which we've never seen, and buyers are being forced to waive contingencies that offer protection in the home buying process. 

One of these protections is the home appraisal. According to HomeLight, issues with the appraisal accounted for 27% of delayed contracts, and 14% of terminated contracts as of July 2021. Though the market may try to force buyers to push the appraisal away and pay with cash, it's important to understand the appraisal process and consider it carefully. 

What is a home appraisal? 

According to NerdWallet, a home appraisal is an estimation of the home's value, as determined by a licensed appraiser. The appraiser will look at features of the home as well as the values of homes nearby to determine the home's true value. Mortgage lenders require these appraisals to ensure that they are lending the proper amount and won't lose money. As Forbes puts it," to reduce the risk of losing money, the banks want to make sure they don't lend more than a certain percentage (typically 80%) of the value of the property...if the value of the property is less than the amount loaned, the bank will lose money (and banks aren't generally in the business of losing money)." 

What is the home appraisal process? 

A home appraisal will typically take approximately two weeks from start to finish. (However, this turnaround time can be affected by the business of the market.) If a mortgage is involved, the lender will choose an appraiser, and the buyer will pay for the cost of the home assessment. An appraisal typically ranges from $300 to $400, but can fluctuate depending on location. 

An appraiser will look at several aspects of the home to determine its value. The size of the property, construction materials, neighborhood and location, internal and external updates, as well market conditions are all factors that affect the value of the home. An appraisal can take anywhere from 15 minutes to an hour to complete. 

With the hot seller's market we are experiencing in 2021, it's possible that the appraisal will come in low. As buyers continue to offer higher offers to out-bid competitors, HomeLight says that appraisers sometimes have difficulty finding the evidence supporting these higher prices. However, you and the buyer can add an appraisal gap guarantee to the purchase agreement that states the buyer will cover the gap between the appraisal's value and the offer on their own. 

Why get an appraisal? 

Simply put, a home appraisal is a better guarantee that you aren't over-paying for your home. If you are unable to pay in cash, a home appraisal is a necessary part of the home-buying process. It determines a fair-market-value for the property that will determine the final loan amount you receive. 

Different types of loans have different requirements, so be sure to check out NerdWallet's comparison here so you know what to expect for your particular appraisal.