The home appraisal
A home appraisal is an independent estimate of the market value of a property. Appraisals can be carried out for a number of reasons, of which the most common is in relation to the sale or purchase of a property.
In the current competitive market, a number of sellers are having their home appraised when they list it for sale. The appraised value helps them determine the right asking price for the home, and it can also be used to reassure a potential buyer that the asking price for the property is reasonable.
Is an appraisal truly independent? Since in this case the seller is paying for the appraisal, it is tempting to think that the appraiser may produce a value that favors the seller, in other words an 'optimistic' value. In practice this is very rare. If the appraisal is carried out by a certified appraiser, then there will be no question that the appraised value will be genuine and without bias.
Occasionally a listing agent or broker will produce a market analysis for his seller. Any valuation offered by a seller and used to negotiate a selling price comes from a properly licensed property appraiser.
There is also another form of valuation called a broker's price opinion (BPO). This is done by the seller's agent on behalf of a bank that either owns the property as a foreclosure or has a say in whether a short sale should go ahead.
Buyer's or Financing Appraisal
When a buyer applies for a mortgage to purchase a home, the lender will in almost every case require a formal appraisal of the property. This appraisal will be paid for by the buyer, and it has to be paid up-front, whether or not the lender subsequently offers financing. Although the buyer pays for the appraisal, the report belongs to the lender, and it is the lender who receives it.
The appraisal is a critical part of the process of assuring the lender that there is sufficient equity in the home to protect them in the case of default. If a lender offers an 80% mortgage, then this will be calculated as 80% of the appraised value, not 80% of what the buyer is paying for the home. In the current rising market this can easily cause problems, because prior sales are likerly to have been at a lower price level than present and future sales.
Sometimes a contract will fail because the buyer cannot get adequate financing due to a low appraisal value.
When the value as determined by the lender's appraisal does not come up to the contract price, it may be necessary for the buyer to bring additional funds to the closing table to bridge the gap, although some lenders will not allow that. Alternatively, a low appraisal may be used as the basis of a re-negotiation of the selling price.