Real estate valuation—or appraisal—is a significant part of the home buying and selling process. Determining the fair market value of a home influences the listing price, the loan amount, property taxes, home insurance, and even the final cost of the property. It is, in a way, at the center of the real estate experience.
There are both formal and informal methods of evaluating the fair market value of a property. When listing a property for sale, for instance, a home seller will likely get a comparative market analysis (CMA) from his or her real estate agent, in order to help them determine the best listing price for a home. Likewise, prior to making an offer on a home, a home buyer will count on their real estate agent to use comps to confirm that the home they wish to buy is listed at a fair price.
A broker price opinion (BPO) is another method of real estate valuation that is faster and less thorough than an official appraisal. This method is often done in the case of a homeowner wishing to refinance, in the process of foreclosure, or when an owner is considering selling.
By far the most common method of real estate valuations is the home appraisal. This process allows a third-party appraiser to determine the fair market value of a house and property. Appraisers are licensed or certified and must follow strict standards within the county and state in order to provide a fair and accurate appraisal of a property.
There are several different factors that influence how much you will pay for your next home. Real estate valuation helps ensure you—and your lender—that you are paying a fair price.
When determining the fair market value of a home, there are several things an appraiser must consider.
- Price: How much a buyer pays (or paid) for the house. This does not necessarily reflect the actual value of the house.
- Cost: The actual cost, today, to build a similar structure on that property.
- Value: What a buyer would likely pay based on the current real estate market and the condition and location of the home. This is the goal of your real estate valuation.
Why is fair market value so important? Nobody likes to pay more for something than what it is worth, least of all your mortgage lender. If the price of the home you wish to buy is $400,000, but the real estate valuation determines the home is really worth $300,000, your lender will likely be unwilling to issue a loan that they couldn’t reasonably recoup if you default on the loan.
Likewise, as the homebuyer, you will want to know that your investment in a new home is sound and that you won’t lose money should you choose to sell the house in the future.
When buying a home, the home appraisal is typically scheduled after you have made an offer, but before your loan—and the sale—are finalized.
The appraisal helps the lender determine the amount of your loan, and therefore must be completed before closing on your new home. Once you have made an offer, your real estate agent will help you through the process of scheduling and paying for both a home inspection and a home appraisal.
The home inspection, which looks much more closely at the condition of the home—whether or not outlets are functioning, foundation issues, and other internal or unseen problems within the house—should be completed before the appraisal.
Real estate valuation, on the other hand, involves a review of the home inspection results, as well as a complete overview of the property and surrounding area.
Home appraisals take the following factors into consideration:
- Size of the house
- Lot Size
- Condition and age of the house
- Upgrades made to the house
- Comparable properties in the area
Most appraisals will cost anywhere between $300 and $500, depending on the size and location of the property. The larger the home, the longer the valuation process takes, as the appraiser does a thorough evaluation of square footage, property lines, and even takes photos of the home being appraised, as well as nearby comparable properties.
Once an appraisal is complete, the data collected will likely be sent directly to your lender. If you wish to see the results of the real estate valuation, you will need to specifically request a copy.
The real estate valuation can often make or break the sale of a home. Your lender will use the appraisal to determine your mortgage loan amount. If the valuation comes back lower than the offer price, however, you may not receive the loan amount you need to buy the house.
In situations where the real estate valuation comes back lower than expected, home buyers can take several different routes. You can pay a larger down payment to make up the difference between the loan amount and the price of the home, your real estate agent can negotiate with the seller for a lower price point, or you can pull out of the sale entirely if the appraisal reveals that the purchase isn’t a worthwhile investment.
Regardless of the results of your real estate valuation, it is important to have an experienced real estate agent by your side to help you navigate the ins and outs of the home appraisal and home buying process. LemonBrew’s agents are highly experienced, local experts who help buyers find the best real estate investment opportunities in their area.