Purchasing a home is a (long) process – there is no doubt about that! Many questions we tend to ask when getting into real estate include the following: How does the loan process work? How does the bank know how much money to issue in the loan? What is an appraiser? What is an appraisal? Where does an appraisal come to play in all of this? Why do we even need an appraisal? Read below to learn these answers, and to understand the importance of an appraisal when it comes down to the home buying process.
An appraisal is an opinion on a property’s value on a certain date, by the appraiser, as of a certain date. The appraiser gives his or her opinion on the current market value as supported by comparable sales and listings. But – what is the significance in all of this and why is this needed, you may ask?
Well, when a buyer is getting a loan, the bank is going to give them the money to purchase a house. The bank wants to know that the house is worth what the buyer is paying for it. Since the lender will be providing the buyer with the amount needed to purchase the home, the lender and buyer bother understand that the home will be the collateral for the loan. Therefore, if the buyer happens to get foreclosed on, the bank will have the ability to sell the subject property and recoup the amount of money that was provided to the buyer to purchase their home. In order for the bank to satisfy themselves with the value of their collateral (the home), the bank pays an appraiser to go out and give them an unbiased property value of the house as of a certain date.
How does this work? After the lender schedules an appraisal, the appraiser makes an appointment with the current homeowner to appraise the property. It is important to note that an appraiser is not a property inspector (who comes out at a different time in the home buying process). After reviewing comparables (property that has recently been sold within a certain radius and of similar size during a certain time period) and noting all of the applicable features and conditions of the home, the appraiser provides a report to the lender with the value of the home and then the lender makes their loan subject to the value reported on the appraisal.
An appraisal is gathered by the sales comparison approach, which uses comparable sales to determine the market value of the property being appraised. The appraiser goes onto the MLS and/or title records to review recent sales and determines which properties are similar to the subject property.
After gathering all the comps, the appraiser drives to the subject property and the comps properties, analyzes the data utilizing the sales comparison approach, takes pictures of all the homes, and puts it together in a report for the lender called an appraisal report. The lender’s underwriting department then is able to review and approve the appraisal. The loan can then finally proceed!
Again, the home buying process is a long one and cannot run effectively without an appraisal if the home purchase is being financed through a bank, thus the job of an appraiser is extremely important. All in all, we hope that you now understand the process of the appraisal better. Check back in the future when we actually interview an appraiser!