Here’s a Comprehensive Guide to Appraisals for Real Estate Agents
As a real estate agent, understanding the appraisal process is crucial for helping your clients to a successfully closed transaction. Appraisals prove an unbiased assessment of a property’s market value. It is important to know that by law, a licensed third party appraiser must complete the appraisal process when a home purchase is financed by a traditional lender.
What is a Real Estate Appraisal?
A real estate appraisal is a professional evaluation that determines a property’s market value, typically conducted by a licensed appraiser. According to the Appraisal Institute, appraisals are essential for ensuring that lenders do not extend credit beyond the property’s actual worth. This protects both the buyer and the lender from financial risk.
Importance for Real Estate Agents
For real estate agents, understanding appraisal helps in several ways:
- Negotiating Leverage: Knowing how appraisals are determined can help you get your clients top dollar at the best terms.
- Client Confidence: A proper appraisal can help your client feel confident about their choices and offer price.
- Transaction Facilitation: A solid understanding of appraisals can help agents manage potential issues arising from low appraisals.
The Appraisal Process
- Order and Preparation: The appraisal process begins when a lender orders an appraisal as part of your client’s mortgage. Some agents make it a practice and a part of their listing services to provide the appraiser with detailed information about the property, including its location, size and features. Learn how to write an appraisal letter here.
- Site Visit: The appraiser conducts a physical inspection of the property. They will measure the square footage, assess the condition, and note any special features. According to the 2021 NAR Report, well-maintained homes typically appraise 5%-10% higher than similar properties in despair. Note: in some instances, it is possible for a buyer to receive an appraisal waiver from their lender.
- Appraisal Approaches to determine market value:
- Comparative Market Analysis (CMA): Appraisers use the Sales Comparison Approach, which compares the subject property to similar homes (comparables) recently sold in the area. A 2021 Zillow report indicates that homes usually sell for about 98% of their appraised value.
- Cost Approach: This requires a lot more skill than the CMA and is not as widely accepted by underwriters. The cost approach is the value of improved property by adding the value of the land to the depreciating value of the property. This may be most used in a scenario of new construction or buildings.
- Income Approach: Used frequently with rental properties, the income approach will take the capitalization rate and convert it into a market value.
- Evaluation of Features: Appraisal assess several factors:
- Location: Homes in desirable neighborhoods can see value increases.
- Condition: Properties in excellent condition can appraise significantly higher. A 2022 study in Remodeling Magazine found that homes with updated kitchens and bathrooms appraised 15% to 20% higher.
- Market Trends: Information like Days on Market (DOM), Months of Inventory (MOI), and median sold price for a specific zip code can give solid indicators of whether a neighborhood is appreciating or declining in value.
- Final Report: After collecting and analyzing data, the appraiser compiles a report detailing the estimated value of the property and the methodology used. This report is submitted to the underwriter for review. Once accepted by the underwriter, it is shared with the buyer. Because the appraisal is paid for by the buyer, and they have a right to privacy in lending, it is not a requirement that the report is shared with the seller or even the buyer’s agent.
Who Pays for the Appraisal Report in a Real Estate Transaction?
Unless otherwise negotiated, the buyer(s) pay for the appraisal report as part of their closing costs.
Importance of Appraisals
- Protecting Lenders: Appraisals safeguard lenders from approving loans that exceed the property’s value. Should the buyer default on their mortgage, the property is foreclosed and ends up on the bank’s asset sheet. The appraisal insulated the lender from major losses in a future bank owned sale of the home.
- Facilitating Fair Transactions: By establishing a fair market value, appraisal aid agents in helping clients negotiate reasonable prices. In competitive markets, homes may sell for above appraised value, emphasizing the need for agents to justify prices with accurate appraisals.
Common Misconceptions About Appraisals
- Appraisal vs. Market Price: Many agents and clients mistakenly believe that appraised value equals the asking price.
- Appraisals vs. Tax Assessments: There is no relationship or influence of the city or county tax assessment of a property for tax purposes on an appraised value.
- Impact on Selling Price: A low appraisal doesn’t mean a sale is impossible. Click here to learn what to do if a house doesn’t appraise.
It is very important to study and learn the process of appraisals as a real estate agent, especially if you intend to specialize as a listing agent. One of the core jobs of a real estate listing agent is to protect the interests of their client in the concepts of market value.
Download Editable Appraisal Template here.
