I hear this story all of the time: A buyer falls in love with a home, then the appraisal comes back lower than expected. Or, a seller hears a number and wonders how their house could be worth less than the one down the street.
Few parts of the real estate process cause as much confusion as the appraisal process. Prices are rising quickly across most Southwest Wisconsin neighborhoods, making the appraisal process feel even trickier than it used to.
Since I have experience in this area, I wanted to take a minute to clear up what appraisals are, why they happen, and why you might see several different numbers.
What is a Home Appraisal?
A home appraisal is a professional opinion of a property’s market value. A licensed appraiser inspects the home, notes its size, condition, and features, and compares it to recent sales of similar nearby homes.
Those comparable sales, often called comps, give the appraiser a reasonable estimate of what the home would likely sell for at that point in time.
One important thing to note here: Appraisers do not set prices. They simply provide an objective estimate based on data. That estimate is what helps everyone else involved in the sale make informed decisions about how to move forward.
Why Do I Need a Home Appraisal?
In most cases, a lender requires an appraiser before approving a mortgage. It makes sense if you think about it. The lender wants to confirm the home is worth at least as much as the loan they’ll give you.
If the loan is more than the appraised value, the lender takes on more risk. An appraisal protects the lender from loaning too much, while also protecting the buyer from borrowing more than the home is worth.
Appraisals also help buyers and sellers set realistic expectations. A seller who understands how the market values their home can price it correctly. On the other side, a buyer who knows the value can go into a negotiation situation with confidence.
Three Numbers That Are Often Confused
During the home appraisal process, you’ll probably hear several figures, such as:
- Appraised Value: The licensed appraiser’s estimate of market value, prepared for a specific purchase or refinance
- Assessed Value: The figure set by the city or county tax assessor. This number is used to calculate property taxes and is not designed to reflect what the home will sell for today.
- Sale Price: What a buyer is willing to pay for a property. This number depends on competition, condition, timing, and negotiation.
While all three numbers are associated with the same property, they are not the same thing. Since they each serve a different purpose, it’s pretty common for them to be different numbers. A home might have an assessed value that looks low, a sales price that comes in higher, and an appraisal that lands somewhere in the middle.
Why Rising Prices Make Appraisals Tricky
When prices climb quickly, appraisals can fall behind. An appraiser relies on recent sales, and if those sales happened several months ago, they may not fully reflect how fast the market has moved. The result is sometimes an appraisal that comes in below the contract price, even when both the buyer and seller believes the price is fair.
This gap can feel frustrating, but it does not mean the home is a bad purchase. It just means that the data hasn’t caught up with the market yet.
A good agent can help you gather recent comparable sales and understand what the appraiser is seeing. This will help you move on to the next step with clear information and a confident path forward.
Most Important Things to Know About Home Appraisals
If you’re thinking about buying or selling soon, here are the most important things you should know about home appraisals:
- An appraisal is a professional estimate of the market value. It is not the final price.
- Lenders use appraisals to protect the loan, where buyers and sellers use them to set expectations.
- Appraised value, assessed value, and sale price are three different numbers, each with its own purpose.
- Fast-moving markets can make it harder for appraisals to match the contract price.
Have Questions About Real Estate Appraisals?
Wondering how an appraisal could affect your upcoming home buying or selling plans? Reach out to me! I’m always happy to walk you through the numbers so that you can come up with a great plan to bring your dreams home!
