Knowing your home’s value is the most crucial thing to understand before you perceive any financial decisions. If you are looking to buy, sell, or even refinance your home, you are bound to undergo an appraisal process.
An appraisal can be nerve-wracking for you if you go through it without understanding the meaning and technicalities. In this article, we will discuss the whole process of real estate appraisals and how they work.
What are Real Estate appraisals and their purpose?
A real estate appraisal is an impartial process to determine the true value of a property in the current circumstances. When it comes to buying or selling a property, there is always a bias between the two parties. When it comes to the seller, they might value the property higher than its actual worth, but on the other hand, the buyer might place a lower value on it because of a preconceived opinion.
To resolve this disagreement, an appraiser is hired to fairly assess the property and come up with a reasonable number that both can agree on. The appraiser systematically evaluates the property, gathers information, and compares the market to calculate the property’s worth.
The appraisal of a property is essential for the banks as they are the ones who need to process the home loans applications.
Property Appraisal Methods
A property appraisal is deemed legit only if it is done by a certified and state regulatory appraiser. There are a lot of aspects that need to be considered before giving an appraisal like, the locality of the property, the condition of the property, the space available, the current market, etc.
To appraise a property, there are three main factors that you should take into consideration.
- Sales Comparison
When a property is up for appraisal, the appraiser should look out for the recent selling prices of properties in the same neighborhood. This gives us an insight into the current market price and how the surrounding properties are priced. Generally, at least three properties are looked at to get an average price among them.
- Cost Approach
When we talk about the cost approach, it means that when the cost of your property should be equivalent to the cost of building it in terms of construction expenses. Owning a property that is expensive to buy but cheaper to construct would be economically illogical.
- Income Approach
A property is appraised based on the income it can generate. This is also known as the income capitalization approach. To calculate the expected rate of return, you take the net operating income and divide it by the capitalization rate.
How does the Real Estate Appraisal Work?
Appraisers take note of each and every detail of the property, assess them, and come up with a true value of the property. Some of the key factors that can help appraisers to appraise a property are as follows:
- The size of the property
- The age of the property
- Location is one of the most crucial things
- The structural strength
- Level of deterioration
- The locality
- Market trends
- Current valuation
- Rental prices
How does the real estate appraisal impact your home loan applications?
The real estate appraisals are significant for home loan applications as the banks assess your application based on your appraisal value. In India, the banks offer up to 80% of your property’s appraisal value depending on your credit score and the loan-to-value ratio. Suppose the appraiser appraised the value of the property to be around 1 crore. The bank will consider this valuation and offer you a loan of about 80% of this value.
Tips for Buyers and Sellers
It is always helpful for buyers and sellers to do thorough research before going through and making any financial decision. Having sufficient information about the property prices in the area can help the buyer to prepare themselves with the correct price expectation, and the seller to make a reasonable quote on the property.
Another important thing for the seller is to have all the property-related documentation at the time of appraisal. Also, while the time of appraisal, both the party’s presence is necessary.
Real Estate Appraisals are an important thing that needs to be done to determine the true value of the property. This can help the buyer, seller, and the bank to make those financial decisions with ease.