Appraisals 101

I’ve addressed appraisals in previous columns but only to a degree so this time, I want to cover the topic a little more thoroughly because determining a property’s value is a very important part of Real Estate transactions.

First of all, a traditional appraisal is required in most cases when a property is to be financed. Like I’ve said before, a lender, aka “the bank”, won’t loan more than a property is worth. The main reason is that if a homeowner defaults on a loan, and the bank then must foreclose on the property, they’ll lose money if the actual value is lower than the loan balance.

So how is the value of a property determined? Well, an appraiser, like a REALTOR®, first runs “comps”. In other words, they look for recently sold properties which are comparable to the property in question. The basic criteria are the number of bedrooms and bathrooms, as well as the square footage and acreage. Other considerations include style, age and location. The appraiser may also conduct a limited visual inspection. However, this is not nearly as detailed as what you’d get from an actual home inspector.

Now, when it comes to government backed loans such as those via VA, USDA and FHA, the appraisal can be a little more complicated. These appraisers inspect the home a little more closely than they would for an appraisal of a conventional loan. However, this too is not as thorough as a actual home inspection, but they may look at the condition of a roof, look for any potential lead-based paint risks, see if there are any safety concerns related to electrical outlets and wiring, moisture and mold concerns or even something as simple as a lack of handrails along stairs, to include those off of a porch or stoop.

A high-octane REALTOR® should know if a home will clear one of these stricter appraisals or if a conventional loan will be better suited since that type of appraisal is more accommodating. Keep in mind that an appraisal is NOT required at all when paying with cash.  So, when the listing agent communicates with buyers’ agents, it would behoove him or her, to communicate with those agents to see what type of financing their buyers are using. It’s probably not worth the hassle for a buyer to submit an offer on a home with VA financing, if the condition of the home won’t meet the standard. This could cause the deal to fall through weeks later and will lead to huge frustration for all parties.

Bottom line up front:

  1. Home inspections are for the knowledge of the buyer and to determine if they want to request repairs, but they’re largely unrelated to appraisals.
  2. Appraisals for conventional loans are for the most part, to determine a home’s value.
  3. Appraisals for government backed loans also determine value, but also have a bit of an overlap with inspections.
  4. Cash deals do not have an appraisal requirement.

Make sure your REALTOR® can guide you through these details.