Summary: The Role of Home Appraisals in Negotiating Real Estate Deals
- Home appraisals assess a property’s fair market value.
- Lenders require appraisals to protect against overvaluation.
- A low appraisal can derail a deal if the sale price exceeds the appraised value.
- Buyers can use appraisal contingencies to exit deals if needed.
- Expert agents can guide negotiations.
Real estate transactions are significant, both literally and figuratively. Buying or selling a home involves hundreds of thousands of dollars (or more) and, often, major changes to your daily life.
Given the value of the asset at the center of the deal, it’s no surprise that home appraisals are required in most real estate transactions. This process determines the fair market value of the home. While appraisals are required by lenders, they provide valuable information to both buyers and sellers.
So, what is a home appraisal, exactly? Why are they so important to lenders, and how can they help buyers and sellers? Let’s take a closer look.
Understanding Home Appraisals: The Basics
What is a Home Appraisal?
A home appraisal is an assessment of a property conducted by a real estate professional. The appraiser’s goal is to determine the home’s fair market value. Practically speaking, this means examining factors such as:
- The size (square footage) and floor plan of the home.
- The home’s overall condition and the condition of its major systems and components, such as the roof, foundation, plumbing, electrical, and HVAC.
- The amenities and appliances present, as well as their condition.
- Exposure to risks, such as flooding.
- The home’s location and the state of the surrounding neighborhood (e.g., Is it growing? Are surrounding homes increasing in value? Or is the opposite true?).
- Recent transactions of comparable properties in the area.
The appraiser will either visit the home in person or conduct a virtual inspection. They will then review similar properties and recent sales in the area. The home appraisal process concludes with a report that lists the home’s fair market value.
As Investopedia explains, buyers normally pay the fee, but the mortgage lender requires the appraisal.
Why Lenders Require Home Appraisals
When a lender offers a mortgage, they require collateral for the loan, which is almost always the home itself.
Lenders are primarily concerned with protecting their investment. A key part of that protection is ensuring an accurate valuation of the home. In the worst-case scenario, if the buyer defaults on the loan, the lender would need to sell the home. If the sale price of the home is too high compared to its actual value, the lender risks losing money.
By requiring an appraisal, the lender ensures that the loan amount aligns with the home’s market value. This way, if the buyer defaults, the lender can recover as much of the loan as possible by selling the property.
The Role of Home Appraisals in Real Estate Deals
We know lenders don’t want buyers to overpay for homes, which is why they won’t approve a loan if the sale price is significantly higher than the home’s fair market value. As you can imagine, this can create serious issues for both buyers and sellers.
Buyers are entitled to a copy of the home appraisal report, as explained by the Federal Deposit Insurance Corporation. If a buyer sees that the sale price is significantly above the appraised value, they may hesitate to move forward. In such cases, the buyer may not have the funds to complete the transaction if the lender denies the loan due to the excessive sale price.
As Bankrate points out, appraisal contingencies are a common—but not required—element in real estate contracts. This contingency gives buyers an option to exit the deal without penalty if the appraisal shows a fair market value lower than the sale price.
So, while the listing price and final sale price are determined by the seller, the appraised value plays a crucial role in real estate transactions. Significant differences between the sale price and the appraised value can derail a deal.
In a hot market, sellers may still find success, as they can often expect offers from other buyers, provided the difference between the sale price and the appraised value isn’t too extreme.
However, the gap between the sale price and the appraised value is always a concern for buyers. It can prevent them from securing a loan or discourage them from making a purchase.
Support from an Expert Real Estate Agent
If you want to sell your home in Northern Virginia, Nikki Lagouros is here to support you throughout the process! From setting the right sale price to offering expert insights during negotiations, Nikki knows NOVA real estate inside and out.