A real estate appraisal is the valuation of a piece of property arrived at by a real estate expert. Appraisals are mandatory in any property deal where a buyer seeks financing from a lender. While professional property valuation may seem straightforward enough in concept, most buyers tend to have little idea what exactly appraisals involve, or how they fit into the grand scheme of things in their plan to buy a home.
According to popular estate agency Wilson Peacock, it isn’t uncommon to find people go so far as to get appraisals mixed up with home inspections. While the two processes are related, in truth, appraisal processes tend to be much more expansive; inspections, the other hand, cover a smaller area of focus, while going far deeper appraisals ever do.
To any buy-to-let real estate investor, a well-thought-out appraisal can help determine the right price to pay, and the value to be obtained in a deal.
What exactly are appraisals and home inspections?
The real estate appraisals process offers interested parties — buyers hoping to buy a piece of property, and lenders preparing to lend to them, an accurate valuation of property in question. It is the value that appraisers determine that lenders tend to accept in their calculations. In general, appraisals are four-part programs:
- The appraiser, an accredited expert in home valuations, arrives at a baseline valuation by measuring square footage of both the plot and the built-up area, verifying all upgrades, and totalling up the value of appliances.
- The appraiser engages a home inspector to determine the physical condition of the building to arrive at a more accurate number.
- The appraiser uses his experience of the local neighbourhood and checks a database of similar properties nearby to determine the more realistic valuation of the property.
- The appraiser asks around about perceived problems to do with property. A property recently involved in violent crime, for instance, could suffer a hit to its value.
How do you know if you have a good appraiser?
Many banks during the housing crisis of 2008 discovered that homes that they had lent money for were actually worth far less than their appraisals found. Appraisers do make mistakes, and it’s important to go with a quality appraiser.
It takes specific knowledge of a home’s location to accurately appraise it for value. Unfortunately, many appraisers work nationally these days, which means that they tend to have little local knowledge. Appraisals by such workers are at best rough estimates. It always makes sense to talk to the bank about finding an appraiser who specializes in the local neighbourhood.
If the bank doesn’t agree to discussing with you their choice of appraiser, you should hire your own appraiser first. When the bank’s own appraiser comes in, you may be able to use the results delivered by your own appraiser to contest the findings of the bank’s appraiser.
Getting a good, reliable appraisal can help in other ways
Most buyers do not actually get to see a copy of the appraiser’s report, even if it is their money that pays for it. You can ask the bank for a copy, though. It’s important to see the report yourself not only because an incorrect report could result in the denial of a loan, but also because your report can help you challenge excessive property tax bills. If the government’s own assessment is incorrect, the bank’s appraisal could help you put in a claim.
If you are renovating, make sure that all work is done by the time the appraiser arrives
Appraisers are paid to take snapshot evaluations of home. If a home that you plan renovation work in isn’t done when the appraiser comes along, any work under progress will usually not be taken into account. It’s important to make sure that the appraiser comes only once all work is completed.
It’s important to remember that an appraisal is not the same thing as an assessment
While appraisals are ordered by individuals or their banks, assessments are ordered when the government needs to revalue property around each community to assess property tax. It’s done once a decade. Since the system and professionals working for the government don’t tend to go into each house to determine what work has been done, they tend to undervalue homes by as much as 25%. Government assessment results also tend to be outdated; they are only done once every 10 years, after all.
KeiraIbbott works in building compliance and has a good understanding of property. She likes to share her insights and tips online and writes for a number of relevant websites.