How Do Home Appraisals Work?

When buying, selling, or refinancing a home, you will likely need to bring in an appraiser to determine the value of your home. 

Although this is a standard process in many real estate transactions, it may be an unfamiliar one for many consumers—especially first-time homeowners. The appraisal process can have a big impact on real estate transactions, potentially affecting not only the value of your home, but also your ability to purchase it through your available financing options.

Read on to learn more about home appraisals and how to make sure this process is supporting your efforts to buy, sell, or refinance a home.

What is a Home Appraisal?

A home appraisal is a thorough inspection and evaluation of your home, with the goal of determining its “true worth.” This is not necessarily the sale price of your home: In a highly competitive market, for example, the market value of a home may be higher than the perceived true worth of that property.

A licensed appraiser will enter the home and build a report that establishes the true worth of the property, including comparable sales and other data points to support this evaluation. 

When a home is being sold, the lender for the buyer is often tasked with ordering an appraisal. The appraised value of a home may affect whether the lender approves financing for that property, or adjusts the amount offered via mortgage.

Why Does the Home Appraisal Matter to Buyers?

If you’re buying a home, the home appraisal offers several benefits. First, it lets you compare the true worth of the home to its market value. Although many homes may be appraised at the same amount as the agreed-upon sale price, there may be situations where the true value is higher or lower than the price that was agreed on.

If the true value is higher, buyers can have more confidence that they’re purchasing the property at a great price. However, if the true value is lower, their lender may only offer to finance a purchase up to the true worth, since lenders are unlikely to offer a loan on an asset that isn’t worth the value of that loan.

If the difference between the true value and the sale price is significant, it could make it difficult for the buyer to afford the home and lead to the termination of the sale agreement.

At the same time, the appraisal can offer an opportunity to renegotiate the sale price based on the appraiser’s conclusions. In this case, the appraisal can help buyers secure a more fair price for the property.

Selling Your Home? Tips to Improve Your Potential Appraisal

Whether you’re selling a home or simply refinancing to pull equity from your property, a higher appraisal can increase the ease of selling your home or the amount of equity at your disposal.

For these reasons, a strong appraisal is always desired. Here are some simple tips to increase the potential appraisal value of your home:

  • Clear out clutter from your home. A cluttered home can look small, and the mess may affect the appraiser’s perception of your home.
  • Have your home professionally staged. Staging can maximize the appeal of your home and influence the appraiser’s opinion.
  • Think about your home’s curb appeal. First appearances make a big difference. Landscaping or even a fresh coat of paint on your front door can make a good impression and raise the perceived value of your home.
  • Look for simple, inexpensive ways to upgrade your home. A fresh coat of paint indoors, new drapes, or other small changes can offer an instant, affordable upgrade—one that boosts both the sale potential and appraisal value of your home.
  • Make a list of improvements to the home. Appraisers may not realize how much work you’ve done on your home since it was last appraised and sold. By pointing them to the upgrades you’ve made to your property, you can nudge them toward a higher appraised value.

Although some buyers and sellers treat the home appraisal process as an afterthought, planning ahead for the impact of a potential home appraisal can be extremely beneficial. Preparing for an appraisal can help you maximize your sale price and avoid the potential complications of being unable to afford the down payment on a home priced higher than its market value.

Shopping for your first home? Download “The Essential Guide for First-Time Home Buyers” today.

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