Appraisals are a confusing topic in the world of real estate, so I wanted to break the process down for you. Perhaps the most confusing aspect is the difference between a home's appraised value and its fair market value.
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Today, I wanted to talk about home appraisals and how appraised value relates to fair market value. These values are not necessarily equal, and that can create issues.
Most real estate transactions today have an appraisal contingency, so any buyer with a mortgage will need to have an appraisal done. The appraisal itself is a formal process in which an appraiser compares the property to other comparable properties.
These comparables will only be properties that sold recently; they don't like to look back further than six months. From a time frame perspective, though, you have to be careful. Even if a house sold five months prior to your appraisal, it could have sat on the market for three months, meaning the information they're using is actually eight months old.
The appraiser will compare features like size, lot size, the number of bedrooms and bathrooms, etc. to the house being sold. Normally, they use three comparables. The challenge from an appraisal standpoint is that a lot of things that buyers are willing to impart value to, like finished basements, may not transfer well in terms of appraised value. A home with an over-the-top , $75,000 finished basement may get a value adjustment of just $12,000 to $15,000, even though a buyer may value it much higher.
If a buyer is putting down 20%, the bank will lend 80% of the appraised value or sale price–whichever is lower. When homes don't appraise for the sale price, it creates a lot of challenges.
I have an appraiser that I work with often, and he always tells people that the appraised value is not the fair market value. The fair market value is essentially what a buyer and a seller agree on in an arm's length transaction. Since the appraiser uses historic data, it doesn't necessarily mean the appraised value is the fair market value. A home needs to appraise for the sales price, but there are a few exceptions. A buyer can offer extra cash, the buyer can come down in sales price, or they can meet somewhere in the middle.
I've certainly been through my share of home transactions where the house didn't appraise. If you have any questions about appraisals or about real estate in general in Bucks County, give me a call. I'd love to hear from you!
Most real estate transactions today have an appraisal contingency, so any buyer with a mortgage will need to have an appraisal done. The appraisal itself is a formal process in which an appraiser compares the property to other comparable properties.
These comparables will only be properties that sold recently; they don't like to look back further than six months. From a time frame perspective, though, you have to be careful. Even if a house sold five months prior to your appraisal, it could have sat on the market for three months, meaning the information they're using is actually eight months old.
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Comparables will only be properties that sold recently.
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The appraiser will compare features like size, lot size, the number of bedrooms and bathrooms, etc. to the house being sold. Normally, they use three comparables. The challenge from an appraisal standpoint is that a lot of things that buyers are willing to impart value to, like finished basements, may not transfer well in terms of appraised value. A home with an over-the-top , $75,000 finished basement may get a value adjustment of just $12,000 to $15,000, even though a buyer may value it much higher.
If a buyer is putting down 20%, the bank will lend 80% of the appraised value or sale price–whichever is lower. When homes don't appraise for the sale price, it creates a lot of challenges.
I have an appraiser that I work with often, and he always tells people that the appraised value is not the fair market value. The fair market value is essentially what a buyer and a seller agree on in an arm's length transaction. Since the appraiser uses historic data, it doesn't necessarily mean the appraised value is the fair market value. A home needs to appraise for the sales price, but there are a few exceptions. A buyer can offer extra cash, the buyer can come down in sales price, or they can meet somewhere in the middle.
I've certainly been through my share of home transactions where the house didn't appraise. If you have any questions about appraisals or about real estate in general in Bucks County, give me a call. I'd love to hear from you!
