The appraisal is one of the most important parts of the home buying process, but it’s also one of the most misunderstood. An appraisal is a report that determines a home’s value. But how that value is determined can be confusing. So, let’s set the record straight on some of the most common myths.
An Appraisal and Inspection Are the Same Thing
A home inspector provides a detailed analysis of a home’s condition to the buyer, alerting them to any potential issues, including structural defects or safety concerns. This is a very thorough process. In fact, according to the National Association of Home Inspectors, there is a 1,600-item checklist inspectors must work through.
While appraisers also thoroughly evaluate a home, they play a very different role. appraisals are Appraisers are highly-trained professionals who are licensed and/or certified to fairly determine the value of a home. To arrive at that value, an appraiser looks at several factors — including the home’s square footage, condition, amenities, and appearance — and compares them against area comparable sales (comps).
Appraisers Work For the Buyer
It’s true that the buyer pays for the appraisal, but the appraiser works for — and is chosen by — the lender. All mortgage companies require a home appraisal before they approve financing because the home serves as collateral for the loan. If for any reason the borrower defaults and the home goes into foreclosure, the lender will need to sell the property to repay the loan.
More Money Spent Equals Higher Value
Maybe you’ve remodeled your kitchen, complete with stainless steel appliances and quartz countertops, or maybe you put in a large swimming pool. You should see that investment pay off when it comes to the appraisal, right? Well, not always.
As an example, let’s look at kitchen remodels. The National Association of the Remodeling Industry estimates the cost at approximately $60,000, but the National Association of REALTORS®, estimates a 67 percent return on that investment. The kitchen is the heart of the home and while many experts agree that improving this room may help sell your home faster, it may not always get you the return you hoped for.
Chris Todd, owner of Todd and Associates, says with any home improvement project it’s all about conforming to the neighborhood.
“If all of the homes in your area have updated kitchens, you could potentially see an increase in value if you renovate your out-of-date kitchen,” he said. “On the other hand, if you sink a lot of money into finishing your basement and none of the other homes have that amenity, you’ve over improved for the area and won’t see much increase in value.”
The Appraisal Provides the Amount the Buyer Should Pay
If the home appraises for lower than the purchase price, the most important thing to know is that the lender will not approve additional funds. The buyer can bring cash to make up the difference, or the parties can negotiate a new purchase price to match the appraisal.
“The bottom line is that the purchase agreement does not dictate the appraisal,” said Todd. “Sometimes they come in higher, and sometimes lower, but if the parties are working with qualified, local REALTORS®, that should minimize any potential issues and surprises.”
All Amenities Are Valued the Same
If you knocked out your garage to build the ultimate man cave, beware that it may not help you when it comes time to sell.
“Again, it all comes down to conforming to the neighborhood,” said Todd. “Before you make any big changes, put yourself in the buyer’s shoes. Would they really want to lose the comfort of parking in a garage for an additional living area or workout space? In our market, most likely not.”
If you’re considering buying or selling a home and would like to consult an expert REALTOR® or appraiser, visit the Greater Lansing Association of REALTOR®’s website at www.lansing-realestate.com to find a list of area professionals.
This article originally appeared on Lansing State Journal: Don’t Fall For These Home Appraisal Myths