When selling your home, the appraisal plays a significant role in determining the market value of your property. The outcome directly affects the sale price as well as financing options for potential buyers.
Understanding what appraisers look for and how their assessments affect your sale is important for setting realistic expectations as you prepare your home to sell. Here’s what you need to know.
"A home appraisal is an assessment of a property's value conducted by a licensed appraiser. It’s used to determine the fair market value of a property based on various factors including its condition, location, size, features, and recent comparable sales in the area. Lenders typically require home appraisals to ensure that the property's value is sufficient to support the loan amount requested by the buyer." -Assessed vs. Appraised Home Value: What's the Difference?
While lenders require a home appraisal to protect their investment, appraisals often serve every party involved as it ensures that the seller receives fair market value for the home and can help the buyer from overspending.
A home appraiser comes to your home and conducts a thorough inspection of the property. They make note of various factors to create an unbiased valuation of the home to share with all parties involved in the sale.
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Low appraisals are caused by a variety of factors, mostly due to market fluctuations. If your home appraises for less than your asking price, don’t panic. While you should be aware that the low appraisal might kill the deal, it doesn’t have to. There are a few things you can do to move toward a successful home sale.
After you’ve reviewed the appraisal and found notes for the appraiser, submit your findings for review (comparable sales, typed errors, overlooked upgrades, etc.) and request a second appraisal. If you don’t have enough findings to warrant an appeal or your request was denied, then you can move forward with the sale using one of the following methods.
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The lender considers the appraisal mainly in relation to the loan-to-value ratio. A low appraisal doesn't necessarily mean the lender won't provide the loan. Instead, they base the loan amount on the agreed-upon ratio in the contract at the appraised value. Sometimes, the buyer's lender may not allow cash to cover the difference, leading the buyer to pay some of the seller's closing costs instead.
If the home is overpriced or the value was inflated, often this is the best solution. It makes the buyer happy and satisfies the lender.
Instead of asking the buyer to pay the entire difference, settle somewhere between a full cash contribution and completely lowering the price. Let’s say the difference is $10,000, you could agree to accept $5,000 in cash and lower the price by $5,000.
If these options don’t work for either party, you may need to cancel the transaction. Many purchase contracts contain a loan contingency. If the appraisal comes in low, the buyer does not qualify to buy the property at the agreed-to terms in the contract. A properly written loan contingency allows the buyer to cancel the contract and requires you to release the buyer's earnest money deposit.
If the buyer is using a VA loan, then there are MPRs, also known as Minimum Property Requirements, to satisfy. While similar, they are not the same thing as a standard home appraisal.
“VA has established Minimum Property Requirements (MPRs) to protect the interests of Veterans, lenders, servicers, and VA. Properties must meet these requirements prior to guarantee of the loan by VA.” - Veterans Benefits Administration
While typical home appraisers assess the property to determine its value, Minimum Property Requirements (MPRs) ensure that military families purchase homes that are safe and sanitary to live in.
For the full list of MPRs, visit Veterans Benefits Administration.
It's often seen as a mundane aspect of home selling, but gaining a clear understanding of home appraisals empowers you to anticipate potential hurdles and navigate towards a successful home sale.