Why is an Appraisal Important?

If you’re buying or selling a home, you may hear about an appraisal during the transaction. But what does a home appraisal actually do, and why does it matter?

Simply put, a real estate appraisal provides an independent opinion of a property’s value. For many financed purchases, the lender uses the appraisal to help determine whether the property supports the amount of the proposed loan.

What Does an Appraiser Do?

A licensed or certified appraiser evaluates the property and considers factors such as:

• The home’s size, condition, and features
• Location and neighborhood characteristics
• Recent sales of comparable properties
• Current market conditions

The appraiser is an independent professional and does not represent the buyer, seller, or real estate agent.

What Happens If the Appraisal Is Lower Than the Purchase Price?

A common misconception is that an appraisal determines what a home is “worth.” In reality, the purchase price and appraised value can be different.

If an appraisal comes in below the agreed-upon purchase price, the buyer, seller, and lender may need to reconsider how to move forward. Depending on the terms of the contract and loan, options may include renegotiating the price, adjusting the financing, bringing additional funds to closing, or reconsidering the transaction.

Your real estate agent and lender can help explain the available options, but the decisions ultimately belong to the buyer and seller.

The Bottom Line

An appraisal provides an important independent perspective on a property’s value and can help protect both the buyer and the lender from overextending on a property.

For buyers, sellers, and lenders, understanding the role of an appraisal can make the real estate process less confusing and help everyone make more informed decisions.

Next in our Who’s Who in Real Estate series: How Do All These Real Estate Professionals Work Together?