Understanding Real Estate Appraisals: How Appraised Value Affects Buying and Selling

When it comes to buying or selling a home, one of the most critical steps in the process is the real estate appraisal. Whether you’re a first-time homebuyer or a seasoned investor, understanding how appraisals work and how they affect your buying or selling decisions can help you navigate the often complex world of real estate. In this article, we’ll break down the purpose of an appraisal, how it’s determined, and how appraised value influences both buyers and sellers.

How is Appraised Value Determined?

An appraiser evaluates a home based on several factors:

1. Comparable Sales (Comps): The appraiser looks at recent sales of similar homes in the area, ideally those that have sold within the last six months. These homes should have similar features, such as square footage, age, and condition.

2. Location: The appraiser also considers the location of the property. Homes in desirable neighborhoods or with good school districts tend to have higher values.

3. Condition and Age of the Home: Homes that are well-maintained, updated, or newly constructed typically have higher appraised values. Appraisers will inspect the home’s structure, foundation, roof, plumbing, electrical systems, and overall maintenance.

4. Size and Features: The size of the home, including the number of bedrooms and bathrooms, as well as unique features like a pool or a finished basement, also factor into the appraisal.

5. Market Conditions: The appraiser may take the current real estate market into account, including the demand for homes in the area. In a seller’s market with low inventory, appraisers may lean toward higher values, while in a buyer’s market, values might come in lower.

For sellers, understanding appraisals is just as important, as the appraised value can directly influence how quickly and for how much a home sells.

1. Setting a Realistic Price: Sellers often rely on an appraisal to set a competitive price for their property. If a home is priced too high, it may not appraise for that value, leading to delays or failed sales. An accurate appraisal can help sellers price their home realistically and competitively.

2. Avoiding Deals Falling Through: If the home is appraised for less than the sale price, a deal could fall through if the buyer is unable to secure enough financing. Sellers may have to renegotiate the price or accept a lower offer if the appraisal doesn’t meet expectations.

3. Appraisal Contingencies: Most real estate contracts include an appraisal contingency, which allows the buyer to back out of the deal if the home appraises for less than the agreed price. Sellers may need to adjust their expectations or negotiate a new deal if the appraisal comes in low.

What Happens When the Appraisal is Low?

Sometimes, appraisals come in lower than expected, which can create complications for both buyers and sellers. Here are a few options to consider if the appraisal is lower than the agreed-upon purchase price:

1. Renegotiate the Price: The buyer can ask the seller to reduce the price of the home to match the appraised value. In a competitive market, the seller might be reluctant to lower the price, but it could be necessary to keep the deal moving forward.

2. Increase the Down Payment: If the seller is unwilling to lower the price, the buyer may choose to increase their down payment to cover the difference between the appraised value and the agreed purchase price. This option is often pursued if the buyer is still committed to purchasing the home.

3. Challenge the Appraisal: If the buyer believes the appraisal is inaccurate, they can request a second appraisal or challenge the findings with the lender. This often requires presenting evidence, such as new comps or other factors that could support a higher value.

4. Walk Away: If the contract includes an appraisal contingency, the buyer has the option to walk away without penalty if the appraisal comes in low.

Conclusion: The Bottom Line

A real estate appraisal is a crucial part of buying and selling property, as it helps establish the true market value of a home. For buyers, understanding the appraised value can guide negotiations and prevent financial surprises down the road. For sellers, it helps set a realistic price and avoid deals falling through due to price discrepancies. Whether you’re buying, selling, or simply curious, understanding appraisals and their impact on the real estate transaction process will give you a clearer view of the market and help you make informed decisions.