Appraised Value: What it Is, How It Works, and How To Improve It
Summary:
Appraised value is the professional evaluation of a property’s worth at a specific point in time, typically conducted by a licensed appraiser. It is commonly used by lenders during the mortgage process to determine the amount of financing a buyer can receive. Unlike market value, which is driven by buyer demand, the appraised value is based on the property’s condition, location, and comparable sales.
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What is appraised value?
An appraised value is the value assigned to a property after a thorough evaluation conducted by a licensed appraiser. This figure is determined by examining multiple factors, such as the home’s condition, location, and comparable property sales in the area. Importantly, the appraised value is primarily used by lenders to calculate how much they are willing to lend when underwriting a mortgage.
This value is crucial because it can directly impact the buyer’s financing terms, particularly the loan-to-value (LTV) ratio. A higher LTV might require private mortgage insurance (PMI) to safeguard the lender. If, however, the appraised value rises, it can provide the opportunity to eliminate PMI payments once the LTV dips below 78%.
The difference between appraised value and market value
It is important to understand that appraised value doesn’t always match a home’s market value. The market value is what buyers are willing to pay for the property, and it is shaped by external market conditions like supply and demand.
A home could sell for more or less than its appraised value. For example, during a seller’s market where demand is high, a buyer might offer more than the appraised value just to secure the property. Conversely, in a buyer’s market, homes may sell for less than the appraised value.
Factors that influence appraised value
Several factors come into play when determining a property’s appraised value. Here’s an in-depth look at the primary elements that can positively or negatively affect the final figure:
1. Comparable property sales
One of the most significant factors is the comparison between the property being appraised and recently sold homes in the surrounding area. Appraisers use recent sales data, also known as “comps,” to estimate a property’s fair value. For this reason, the housing market’s overall strength, and the value of similar homes in the neighborhood, can have a big impact.
2. Property condition
The condition of the property plays a major role in appraised value. If the home has been well-maintained, has no structural issues, and has had any necessary repairs, it’s likely to receive a higher appraised value. However, if there are significant problems, such as a leaky roof or faulty wiring, the value could be lowered substantially.
3. Location and surrounding amenities
The property’s location and proximity to schools, shopping centers, public transportation, parks, and other amenities can significantly affect its appraised value. Being close to desirable features can increase the value, while proximity to negative elements like industrial sites, landfills, or noisy areas could reduce it.
4. Size and layout
The size of the home, including the number of bedrooms and bathrooms, can influence its value. Larger homes or those with flexible living spaces, such as additional rooms that can serve as offices or guest bedrooms, are often appraised at higher values. Open-concept designs and modern layouts are increasingly popular and can boost value as well.
5. Recent upgrades and renovations
Investments made to improve a property’s overall appeal and functionality often result in higher appraised values. Installing energy-efficient appliances, adding outdoor living spaces, or upgrading kitchens and bathrooms are just a few examples of improvements that may increase the appraised value.
How appraised value impacts mortgage financing
The appraised value has a direct influence on mortgage financing, determining how much a lender is willing to extend for a loan. If the appraised value is lower than the agreed-upon purchase price, the buyer may have to renegotiate or provide additional funds to cover the difference.
Loan-to-value (LTV) ratio
The LTV ratio is calculated by dividing the mortgage amount by the appraised value of the home. For instance, if a home is appraised at $300,000 and the buyer is applying for a $240,000 loan, the LTV ratio is 80%. In general, an LTV ratio above 80% may require the buyer to purchase PMI.
Improving your appraised value
If you plan to sell or refinance your home, increasing your appraised value could give you more flexibility and favorable financing terms. Here are some ways to boost your appraisal:
1. Boost curb appeal
First impressions count! Simple things like landscaping, fresh paint, and well-maintained exteriors can positively impact the appraised value of your home. This is especially true if your property looks neat and stands out compared to neighboring homes.
2. Make necessary repairs
Addressing any deferred maintenance or structural issues before the appraisal is crucial. Leaky roofs, broken windows, or faulty electrical systems can detract from the home’s value, even if they seem minor.
3. Upgrade key areas
Focus on high-impact renovations, particularly in the kitchen and bathrooms. Updated countertops, appliances, and new fixtures can lead to a significant increase in appraised value.
4. Enhance energy efficiency
Homes that are energy efficient are more valuable in the current market. Consider upgrading to energy-efficient windows, adding insulation, or installing a smart thermostat system. These improvements can reduce utility costs and increase the property’s appeal.
Appraised value in real estate transactions
In real estate transactions, appraised value plays a pivotal role. It’s the lender’s safeguard to ensure that they are not loaning more than the property is worth. Here’s how it works in different scenarios:
When buying a home
When a buyer applies for a mortgage, the lender orders an appraisal to confirm the property’s value. If the appraisal is lower than the purchase price, the buyer might need to bring in extra cash or renegotiate the deal. In some cases, the transaction may even fall through.
When selling a home
Sellers often aim to set a competitive asking price that reflects both market conditions and the home’s appraised value. However, if the appraised value is significantly lower than anticipated, the seller may have to lower the price to attract buyers or risk losing the sale.
Conclusion
The appraised value plays a crucial role in real estate transactions, impacting the amount of financing a buyer can secure and influencing the terms of a mortgage. Understanding how appraised value is determined, and the factors that can affect it, empowers homeowners to make informed decisions about buying, selling, or refinancing a property. By taking steps to improve their home’s appraised value, homeowners can potentially increase their property’s worth and secure more favorable loan terms.
Frequently asked questions
What is an appraised value used for in real estate?
An appraised value is used to assess the value of a property for mortgage underwriting. Lenders rely on appraisals to ensure they are not lending more than the property is worth. It is also used for tax assessments and insurance purposes in some cases.
Why might appraised value and purchase price differ?
Appraised value and purchase price can differ because appraisals are based on the property’s current condition, location, and comparable sales. The purchase price is driven by what a buyer is willing to pay, which may be influenced by factors like competition, buyer urgency, or personal attachment to the property.
How long is an appraisal valid?
Typically, an appraisal is valid for 60 to 90 days. However, market conditions can change quickly, which might require a more recent appraisal if there’s a significant delay in closing or refinancing.
Can I dispute a low appraised value?
Yes, if you believe the appraisal is incorrect, you can challenge it by providing the lender with additional data, such as recent comparable sales that may not have been considered. You can also request a second appraisal, but this may come with additional costs.
How do appraisers determine a home’s value?
Appraisers determine a home’s value by inspecting the property and comparing it to recent sales of similar properties in the area. They also consider the property’s size, condition, location, and any recent upgrades or renovations.
Does improving curb appeal affect the appraised value?
Yes, improving curb appeal can have a positive impact on your appraised value. Simple changes like landscaping, painting, and exterior repairs can enhance the property’s appearance and potentially increase its valuation.
Key takeaways
- An appraised value is a professional assessment of a property’s worth at a given point in time.
- The appraised value often differs from market value, which is determined by buyer demand.
- Lenders use appraised values to calculate loan-to-value ratios and determine how much to lend.
- Homeowners can increase appraised value by making upgrades, improving curb appeal, and ensuring necessary repairs.
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