Home Appraisal Basics

A big part of the home sale process is the appraisal. No matter how much a seller wants for his home, or how much a buyer is willing to pay for a home, in the end, it all comes down to the appraisal.

What is an Appraisal?

A real estate appraisal establishes the market value of a property: the amount of money a willing buyer will pay a willing seller. Since the home will be used as security for the buyer’s loan, the lender requires an appraisal to provide assurances that should the buyer default on the loan the lender can sell the home for the amount it is financing.

Once the home is under contract, the appraisal becomes what is known as a "contingency item." This means that the purchase of the home is contingent on the home appraising for the purchase price. If it doesn't, the buyer has the choice of walking out on the sale or renegotiating the price with the seller.

How Does the Process Work?

The appraisal is ordered by the buyer's lender, paid for by the buyer, and performed and compiled by a licensed appraiser who will, first of all, inspect the home. Then, he or she will look at the recent sales data for comparable houses in the neighborhood.

Ideally, the appraiser wants to find houses within a mile of yours that are of a similar type, age and size, that have sold within the past six months. In some real estate environments, this isn't an easy task. In sluggish markets, appraisers sometimes have to expand their geographical area or look at older sales.

Then, using his or her training, experience and judgment the appraiser will make adjustments to the sales prices of your home when comparing it to the others to arrive at a value for yours. This is the only value the bank will accept - not the CMA and not what the seller wants to get for the house - the appraisal is the final arbiter of what the home is worth.

If your purchase agreement has a sales price over that of the appraised value, the contract will need to be renegotiated to make sure the sale will go through. This is where your real estate agent earns his or her keep. Choose wisely.