I think everyone knows the basics of what an appraisal is. But do you know why it is done or how the appraised value is reached?
An appraisal is a report produced by a licensed appraiser to establish the fair market value of a property. The appraisal is paid for by the buyer but is done to protect the lender. Lenders of course don't want to loan more money on a property than it is reasonably worth (the appraised value).
If a property does not appraise for the agreed upon purchase price or more, then the buyer will have to make up the difference with cash or financing from another source. For this reason it is common that there is a contingency that the property must appraise for the purchase price or higher. With this contingency if the appraisal comes in low, then the buyer has another option which is to withdraw from the contract unless the seller agrees to reduce the price to the appraised value.
To establish what a home is worth, the appraiser is going to select three or more recent sales in the neighborhood that are most comparable. Then to account for differences in the properties adjustments are made. For example If the subject property has two fireplaces and the first comparable property only has one, then an adjustment would be added to the sale price of the comparable property to bring it up to the same level as the subject property. On the other hand if one of the comparable properties had more square footage than the subject, then the sale price of that home would be reduced. Once all adjustments have been made, the adjusted sale prices of the comparable homes are used to calculate the appraised value of the subject property.
This summarizes the purpose and process of appraisals. Of course this is a simplified explanation but should give everyone a better understanding of the topic.
Troy Trumm, Trumm Team - Omaha, NE
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