What is a House Appraisal? How Does It Work?
A home appraisal is a necessary part of any real estate transaction. It’s meant to reflect the actual value of a house based on an objective evaluation by a licensed professional.
If the appraised value of a home matches or exceeds its selling price, the transaction carries on as usual. But if the appraised value turns out to be lower than the house price, the transaction could be pushed back or canceled altogether.
When you sell your home, your buyer (or their lender) will most likely order a home appraisal before finalizing the sale. When you apply for a mortgage or refinancing, you’ll most likely have to pay for a house appraisal. But what is house appraisal and how exactly does it work?
Header image source: Pexels
How Appraisals Work
When a licensed or certified appraiser evaluates a home, they have to physically visit the home and look at its technical aspects. This includes the square footage, amenities, and functionality of the house.
A home appraiser looks into all the elements of a house that increase or decrease its value. They also compare the house to other properties in the area and look into the current market trends in the neighbourhood.
They use all these to “put a price” on the home and determine its actual value based on unbiased standards.
For buyers, a house appraisal is basically a way to avoid overpaying for a home. This is highly important for buyers who will pay in full cash for the home. No one would ever want to pay more than a home is actually worth.
For a mortgage lender, it’s a way to make sure that a house is really worth the amount that they’ll lend the borrower. It will serve as collateral if the borrower ever defaults on the mortgage payments. And that’s why they want to make sure that the house value lives up to its selling price.
For sellers, it could serve as a way to determine the highest price they can sell the house for. Also, if the appraised value is lower than expected, they can either lower the selling price to reflect their home’s actual value.
They can also make some changes to the home so that its value increases. Simple renovations like repainting the exteriors or improving the home’s curb appeal can already increase its property value.
For refinancers, the goal is to get the appraised value of their home as high as possible. This builds into their equity and determines how much they can borrow. The higher their property value, the higher the amount they can borrow for refinancing.
Home Appraisal vs. Home Inspection
Simply put, a home inspection is more in-depth than a home appraisal. A home appraisal looks into the value of a home while a home inspection looks into its condition.
In a home appraisal, they only look at the things and features of a home that can be seen with the naked eye. Appraisers could take note of a crack in the wall or a leak in the ceiling.
But things like, say, an outlet that doesn’t work or an air conditioner that takes too long to cool the room don’t factor into the “value” of a home.
It’s the inspectors that look into these things. They do a thorough check of the house to find out all the damages that come with it. They inform the buyer of these defects and help them decide whether to really get the home or not.
Appraisals are required and are more for the lender’s sake. It’s the home’s value that they’re most concerned about.
On the other hand, inspections are optional and are more for the buyer’s sake. It helps them know whether the home is worth the purchase before closing the sale.
How Much Do House Appraisals Cost?
Typically, you can expect a home appraisal to cost anywhere from $300–$500 in Canada. But as with everything else, the costs can vary on a case-by-case basis.
When the home appraisal is ordered by a lender, they’re also usually the one who hires a home appraiser. You don’t really have a say when it comes to these things. As a borrower, your only responsibility is to pay the appraisal fees.
If you’re paying in full cash and having the appraisal done on your own accord, you’re free to hire whomever you want. Just make sure that they’re licensed and that they know the local area well. This helps you get an accurate evaluation of the home you’re about to buy.
Other factors such as location can also drive up appraisal costs. When you’re having a property appraised in a major city or the downtown area of a city, the appraisal fees are usually higher. In some areas, the appraisal fees could even reach $1,000.
Selling Your Home
Image source: Pexels
While you won’t have to cover the appraisal fees as a home seller, you still have to cover other costs of selling a home. It’s not as easy as making a listing for your home and waiting for a buyer to contact you.
What you can do, though, is to avail of a free home evaluation service that some real estate companies provide. This will give you an idea of how much to sell your home for so that you can get as much profit as you can from it.
To recap, here’s how a house appraisal works:
- A licensed appraiser looks into the visible and technical aspects of a home and assigns a value to these. They would also do some research on the local housing market and see how the house compares to other properties in the neighbourhood.
- It’s usually the lender who requires a home appraisal before approving a borrower’s mortgage.
- For buyers, a home appraisal is simply a way to avoid overpaying for a home. If they want to know about the house’s condition, they can hire a home inspector to thoroughly check the home.
- A home appraisal could also be a way for sellers to have an idea of how much they should sell their home for.
- For those applying for refinancing, the goal is to get as much appraised value as possible so that they could have more equity in the home and be able to borrow more.