The 2021 real estate market has been fast-moving and high priced. In fact, houses are regularly selling for 100K over the asking price. This could become a problem, however, when the bank does the appraisal as part of its underwriting process. 

What is an appraisal?

An appraisal is a bank estimated value of a home based on its size and location. 

Who orders an appraisal?

The appraisal is ordered by the prospective buyer's bank. Typically, the buyer's agent will contact the listing agent to coordinate a time for the appraiser to enter the property and perform an assessment. The appraiser will take pictures and measurements of the home and surrounding property. 

Who performs an appraisal?

The appraiser is an independent third party who has been hired by the bank or mortgage lender. In fact, they are required to maintain that independence due to the Frank-Dodd Act of 2009 that was created after the housing bubble burst at the start of the Great Recession. During that period, almost 90 percent of appraisers felt "pressured" to state a home's worth as higher than the true value. 

How do appraisers determine a value for a home?

Appraisers take many factors into consideration when determining the value of the home. They look at square footage, amenities, and lot size as well as the number of bedrooms, bathrooms, and garage spaces. They also look at comparables. 

Comparables, often just referred to as 'comps' in the real estate industry, are houses similar in size that have sold in the same area recently. Two 1,500 square foot homes in the same neighborhood would be comparables. A 1,500 square foot house two cities over is not. Likewise, you cannot compare a 1,500 square foot house to a 3,000 square foot house. 

What happens if a home does not appraise for the amount in the purchase agreement?

Your bank will only loan money for what the house is deemed to be worth. If the house does not appraise for what you offered, you have a few options. You can walk away without consequences or loss of money, or you can pay the difference between what your bank is willing to lend and the appraised value out of your own pocket. 

You cannot ask the appraiser or the bank to manually adjust the amount of the appraisal, even if you feel you have proof that the home should appraise higher. In fact, it is illegal for the appraiser to misrepresent the value of the property during the appraisal process. 

It remains to be seen how or if the appraisal will come into play during this real estate market. Understanding how and why an appraisal is needed, however, will help you in the home buying process. Contact a company that offers appraisal services to learn more.