Why do you need an appraisal?
A home lender — a bank or other creditor — requires an appraisal to ensure the home is worth what the buyer is paying, and to help determine if a lender is likely to be repaid for the loan if the home must be sold because the buyer defaults on the mortgage loan.
This is a key step in getting a mortgage and acts as a safeguard for the bank. Plus, a home that's damaged beyond repair or overpriced for the market could tank even the most careful saver's entire financial plan. Ultimately, it's a win-win situation where both banker and homebuyer can benefit from an appraisal.
“The fair market value of a home is an unbiased opinion. The appraiser has no agenda other than to make sure the property isn’t overpriced,” says Gynell Vestal, owner of Vestal Appraisal Solutions in Houston, TX, and founder of the Consumer Home Value website.
Vestal feels the appraisal process can also help safeguard the larger economy. How? Because economic bubbles (where the price of something exceeds the actual value) can occur when too many homebuyers pay too much, and then can't later sell their homes for what they thought they were worth. Fair appraisals can keep a bubble from ballooning, and, ultimately bursting.
While it's typically the mortgage lender that orders the appraisal, the homebuyer foots the bill. The average cost is between $300 and $400. Homebuyers aren't prohibited from tagging along when an appraiser tours a soon-to-be-home, but it's a step that many real estate agents find unnecessary. The appraiser is required to disclose any information that is integral to the valuation of the property in the appraisal report. Lenders are in turn required to forward a copy of the appraisal report to homebuyers if the loan is a first lien.
Sami Sada, an independent home appraiser with Sada Associates, recommends an appraisal, even for cash buyers who aren't seeking a mortgage. Otherwise, a buyer can easily pay more than a fair asking price, particularly in an area where homes sell quickly and decisions can be made hastily. “A few hundred dollars is a good investment when you’re investing hundreds of thousands of dollars in a property,” Sada notes.