Home Appraisal or Valuation
- October 4, 2018
- Investing, mortgages and property investments
- Posted by financedbij
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Understanding The Home Appraisal Process
When you buy a home using financing from a bank, refinancing your existing loan, or selling your home through a Real estate other than an all-cash sale, the home appraisal is a key component of the transaction. Whether you’re a buyer, owner or seller, you would want to understand how the valuation/appraisal process works and how an appraiser determines a home’s value which helps you making a knowledgeable decision.
What Is a Home Valuation/ Appraisal? & Why is it important?
A valuator is an unbiased professional opinion of a home’s value. Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.
Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as Security/Collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will recoup the money it lent by selling the home. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.
It is important to get a valuation appraisal done if you are seriously considering on a particular property that fits your life style & one that is close proximity to amenities viz. School, Train, Tram or Bus and shopping Centre and access to Freeways through a panel Valuator after you know your maximum borrowing Capacity given the last few years unprecedented property value increase as you don’t want to be paying more than what the actual value of the property is worth.
Note: If you’re considering a refinance, it is beneficial to research interest rates using /mozo.com.au/home-loans or contact email@example.com your senior home loan broker who has 30 plus banks & lenders on their panel to choose the right home loan solution that fits your lifestyle and financial goals.
The Appraisal Process and How Appraisal Values Are Determined
Because banks valuation primarily protects the lender’s interests, the lender will usually order the valuation. According to the REIV Institute, an association of professional Real Estate appraisers, a qualified appraiser should be licensed or certified (as required in all states) and be familiar with the local area. Federal regulations state that the appraiser must be impartial and have no direct or indirect interest in the transaction. REIV requires appraisers to certify that they have experience appraising similar properties in the same geographic area.
A property’s appraisal value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in assessing the home’s value. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needing repairs and condition of the dwelling.
Typically, appraisers use REIV Appraisal Report or Core-logic Valuation Report for all types of homes. The report asks the appraiser to describe the interior and exterior of the property, the neighbourhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on his or her observations.
The report must include a street map showing the appraised property and comparable sales used; an exterior building sketch; an explanation of how the square footage was calculated; photographs of the home’s front, back and street scene; front exterior photographs of each comparable property used; and any other information, such as market sales data, public land records and public tax records, that the appraiser uses to determine the fair market value. An appraisal from the real estate does not cost much at all and when the banks perform a valuation depending on the lender the cost is borne by the lender, but some lenders do charge a valuation cost which the borrower bear the cost.
What Home buyers Need to Know
When you’re planning to buy a home, and you’re researching in which suburb and what property to buy based upon your borrowing capacity (which can be evaluated by contacting DBIJ Finance who will complete a Pre-Approval with a lender of your choice as per income earned and liability) and before you proceed to inspecting properties, the appraisal will be one of the first steps involved in the process. If the appraisal comes in at or equal to the contract price, the transaction proceeds as planned. If the appraisal comes in at higher the contract price, however, it can delay or derail the transaction.
Chances are neither you nor the seller wants the transaction to fall through once the contract is signed. As the buyer, you have an advantage in that a low appraisal can serve as a negotiating tool to look for a bargain by way of negotiating with the seller to lower the price. The bank won’t lend you or any other prospective buyer more than the home is worth (in fact, a maximum of 80% of the value is typical LVR (Loan to Valuation) when borrowing funds from the bank).
While appraisals help buyers avoid overpaying for homes, a seller may feel that a low appraisal is incorrect and be reluctant to drop the price unless they have paid a deposit for a new purchase with the intent of selling current property at Market Value. If a bad appraisal is standing between you and your home purchase, look into getting a second opinion via another appraisal by another person. Appraisers can make mistakes or have imperfect information.
What Home Sellers Need to Know
As a seller, a low appraisal, if accurate, means you will have to lower your home’s price to get it sold given the price drop of properties and the shift in property market from seller’s market to Buyer’s market.
Unfortunately, recent distress sale or mortgagee auctions in the surrounding area can lower your home’s appraisal value. If you feel that your home’s value has been dragged down by the sales prices of nearby property by a short sale, you may be able to convince the appraiser that your home is worth more if it’s in significantly in a better condition than those properties. Sellers should also know that federal guidelines (intended to eliminate the inflated appraisal values that contributed to the 2008 housing crisis) sometimes cause appraisals to come in below Market Values and can make low appraisals difficult to challenge.
What Refinancing Homeowners Need to Know
If you’re refinancing a standard Mortgage, a low appraisal can prevent you from doing so. The home needs to appraise at or above the amount you have purchased as sometimes with market correction, the borrowed amount from the bank should enable you to move to another bank with a better interest rate thus helping with Cash flow or borrow more to do required renovations or use equity to invest in another property to leverage of the changed property market conditions.
The Bottom Line
When everything goes smoothly, the home appraisal is just another box to tick on a checklist. When the appraisal value is lower than expected, the transaction can be delayed or even cancelled. Regardless of which situation you encounter in your home buying, selling or refinancing experience, a basic understanding of how the appraisal process functions can only work in your favour.