A Brief Introduction To Appraisals
Another element of the home buying or home selling process that could probably use some explanation is the appraisal. Below is a quick overview of what an appraisal is and does.
In a financed purchase, which constitute the majority of most home transactions even in a market like Portland, an appraisal will be required by the buyer’s lender.
Most people view the appraisal as the final authority on the value of a home. However, the purpose of the appraisal isn’t necessarily to protect a buyer from paying too much for a property. The real purpose of the appraisal is to protect the lender from over extending their position in a property. Most institutional lenders need to be somewhat conservative in their lending practices to avoid risk. The appraisal is essentially a way for the lender to collect data for valuation of a property, in order to obviate loss, should their borrower default on the mortgage. Therefore, an appraisal is simply an opinion from a licensed appraiser as to the value of the property.
The appraiser is a third-party to the transaction and must maintain neutrality with regard to the principals (buyer and seller) in the transaction. The buyer is responsible for the cost of the appraisal, which can vary situationally. In some cases, a lender may not require an appraisal, given that the buyer is putting a substantial amount into the down payment for a property.
Appraisals can be performed in a number of different ways, however the majority of residential appraisals utilize the sales comparison or substitute property method. This method is also similar to the method that realtors utilize to develop a Comparative Market Analysis (CMA). However, a realtor's market analysis is not the same as an appraisal. Other methods of valuation that appraisers might use is the Cost Approach and the Income Capitalization Approach. The Cost Approach takes into account the cost of the land being transferred, and what the cost might be of reproducing the same structure currently attached to the land. The Income Capitalization Approach is used to determine value based upon the income potential that a property has or could have based on highest and best use. In most cases pertaining to existing residential property, the sales comparison approach is the most accurate method of deducing market value.
If a transaction experiences an issue where there is an appraisal value that comes in lower than the current sale price, there are ways to resolve the low appraisal and allow the purchase to complete. In some cases, a buyer may be willing to cover the difference with cash, or a seller may be willing to renegotiate the sale price. In addition, there may be other, creative ways to find a path forward. Your real estate broker should be able to help you to determine your options, and how to best proceed to meet your goals/needs.