What’s an Appraisal, and Why is it Important?

No two homes are alike. For this reason you will need to have your new home appraised before the lender approves your mortgage loan. So, what exactly is an appraisal? An appraisal is a judgment of worth by a professional. The appraiser will visit your home and inspect the size, condition, quality and function. The appraiser will then produce a detailed report using comparisons to the sale prices of similar homes in the area, determining the value of your home.

The value of your home can be adjusted in relation to what the other properties are actually selling for in your new neighbourhood. A home with 4 bedrooms generally carries a higher value than a home with only 3 bedrooms in the same area. A home that requires exterior painting carries a lower value than a home that been recently painted. A home with a dirt driveway instead of a paved driveway will also carry lesser value.

Here’s why you need to have your new home appraised: an appraisal protects both parties involved with the loan. The lender is protected because the appraisal will give them a clear cut idea of how much they’ll lend you based on the properties worth. You, the buyer are protected because you know you won’t be over paying for your new home because you’ll know how much the property is worth. Having an appraisal done is perfect for those heat-of-the-moment type buyers who offer a price for the home that is way too high. The appraisal will flush the high offer right down the drain.

Appraisals typically cost anywhere from $125-$500. The cost varies based on property type, location and square footage. Appraisals for properties in rural areas and multi-unit properties will cost more than single-family residences in densely populated areas.

Most lenders have professional appraiser firms they work with, and usually, the lender will take care of setting up the appraisal for your property. Unlike home inspections, the buyer does not accompany the appraiser while the appraisal is done. Under most circumstances the buyer doesn’t know that the appraisal has been completed until it is in the lenders hands.

More often than not, people confuse an appraisal with a home inspection. Appraisers make mentions about the obvious problems they see but they do not test appliances, inspect the roof and chimney etc. That is the work of a home inspector, whose job it is to determine the condition of the home, not its value.

There are three approaches to conducting appraisals:

  • The cost approach: increased depreciation is deducted from the property’s replacement cost at current prices.
  • The market approach: basis of the prices at which similar items are available or were sold within the last 3-6 months, while making appropriate adjustments for differences in quality, quantity and size.
  • The income approach: opportunity cost comparing the net income the property would earn if rented out over its remaining useful life with the income that could be earned if the amount of its purchase price was invested in ventures of equivalent risk.

The most common type of appraisal consists of interior and exterior photos, comparison sales and a complete cost breakdown of the property. This type of appraisal blends the cost and market approach. Combined, these approaches establish the cost of rebuilding the structure from the ground up and then compare the value of homes in the area.

If the appraisal is lower than the maximum amount the lender is willing to finance, the loan cannot proceed until the seller lowers the price or the buyer increases the amount of their down payment.

Although an appraisal is another cost that must be absorbed by the buyer, it is always money well spent. Think of an appraisal as an investment of a few hundred dollars that can prevent you from paying more than the property is worth. A sound investment indeed!


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