Home Buying FAQs: What is an Appraisal and Why Does it Matter?

The 2015 real estate market is starting off with a bang.  Pent-up demand has buyers out in packs, competing head to head for the listings that come on the market.  Sellers in the Denver market are seeing showing traffic in the first few hours on the market, and multiple offers are not unusual.

With all of the fervor, under contract prices are often pushed past what the listing price is.  Excited buyers are offering $5,000, $10,000, even $25,00o or more over the home’s asking price to ensure that they will lock down the home and get it under contract.

But hold on… Can the house actually close at this price? locked_house(1)

Most home buyers need some kind of loan to buy a home.  There are several products out there, but the thing that loans have in common is that they are backed by collateral.  In the case of a mortgage loan, the collateral is the home itself.

Because of this, the bank providing the loan will order an appraisal.  An appraisal is an independent evaluation of the property, conducted by a licensed professional (the appraiser), to determine whether the property is a good risk.  In the event that there was a default on the mortgage loan, the bank wants to ensure that there is sufficient collateral to recoup any loss.

The appraiser will go to the property and assess the condition of the property.  The appraiser will take pictures and measurements, sketch out a floor plan, and make notes of the features and the location.  He or she will then compare the subject property to properties of similar size, amenities and age to determine whether the lender’s investment is sound, and put a value on the property.  When comparing properties, the most “weight” is given to homes that have sold recently, although in an appreciating market, under contract and actively listed homes may be considered as well.

The appraisal value determines how much the bank will lend on the property.  If, for example, the appraisal value is $300,000, that will be the amount of the mortgage.

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