Why Appraisals Are Important to Buyers and Sellers

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Appraisals are an important part of most real estate transactions. Here’s why.

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All of a sudden, our clients have been seeing a number of appraisal issues pop up, so I wanted to do a series of videos that explains the process, the problems, and some common solutions.

An appraisal is a formal valuation of a home’s current market value. When a buyer sends a sales contract to a lender, the lender orders an appraisal.

How does the appraiser know what current market value is? Their most important tools are sold comps. Those are recently sold homes in the same neighborhood of a similar age, size, and quality of the home in question.

An appraisal is ordered by a lender.

Appraisers then compare each of the sold comps with the property that’s under contract by making price adjustments based on different characteristics. If the contract house has a bigger lot or better location, they can adjust upwards, or the other way around if it needs maintenance.

Appraisers must use Fannie Mae guidelines for the values of the adjustments they take and lenders are not allowed to contact appraisers. Agents can speak to them only when the appraiser calls to ask questions.

Once the report is complete, it’s sent to the buyer’s lender, who makes a lending decision based on the report. To learn how an appraisal can affect your sales contract, stay tuned for our next video on the outcomes of appraisal reports.

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