If you are thinking about buying a home in the Richmond real estate market, or are currently involved in a Richmond home purchase transaction, then you may be familiar with the term "appraiser" but you may not understand their role in the Richmond real estate process.
An appraiser is an unbiased party to a real estate transaction who ensures that the value of the home is in line with the purchase price contracted for. The appraiser receives no other compensation, other than their flat fee for their services, so they can remain a neutral party - they get paid no matter what the outcome of the appraisal!
How does an appraisal work? If you are obtaining financing for your purchase then your bank, lender, or financial institution will order an appraisal via a third party vendor. If you happen to be a cash purchaser, you will select a licensed/certified appraiser, who is familiar with the area, and hire their services. The appraiser will then make an inspection of the home under contract to determine the worth of the property. The appraiser evaluates many aspects including square footage, location, features, and even defects. Then they get to doing their homework!
In the case of a home purchase, vs. a rental, the appraiser will turn to two approaches to determine the value of the home. First is the Cost Approach. This technique takes into consideration what it would cost today to build a similar home of the property in question. You may just find it is more economical to build a brand new similar home with the benefits of today's technology than buying the older home with possibly outdated systems for more money.
The second approach is the Sales Comparison which evaluates recent home sales of comparable properties to the home under contract. After comparable properties have been established, the appraiser will "give weight" to certain features, such as if one comparable home has 3 bathrooms vs the home under contract having just 2. Value adjustments are made, as close as possible, to make apples to oranges more of a balance of apples to apples.
Once these determinations have been made and both approaches evaluated together, a report will be generated with what the appraiser feels is the value of the home under contract.
Why is this important? It all comes down to your hard earned cash. If you are contracted to purchase a home for $300K and the appraisal comes in at $275K, there is the potential to over pay $25K for the home! Banks, lenders, and financial institutions are not willing to loan money to a buyer for more than the home is worth. In this case, the buyer will have to come up with the extra money to make up the difference, the seller can lower the price of the home to the appraisal price, or, if a compromise can not be made, the parties may terminate the contract. In the case of a cash purchase, the buyer has some big decisions to make. They may continue with the sale as it has been contracted for, ask the seller to lower the price to the appraisal value, or the parties may terminate the contract if there is no meeting of the minds. A cash purchaser will only have these options if they elected to have an appraisal be part of the contract when the offer was presented. Although some cash buyers may proceed to purchase the home for more than it is worth, many may not be willing to over pay just because they have the money to do so.
Remember, an appraisal is an unbiased opinion on probably the biggest financial investment you will ever make!
Thinking of buying or selling in the Henrico County Real Estate or surrounding Richmond Real Estate market? Contact me, Shannon Milligan at Home Sweet Henrico with Keller Williams Realty Richmond West, today!
