If you’re going to use a mortgage loan to buy a home in the state of Washington, you’ll probably experience the home appraisal process firsthand.
There’s not much for you to do during this process. Most of it happens without your direct involvement. But you should at least understand how the process works since it can affect your ability to qualify for a mortgage loan.
This article will explain the interconnected relationship between home appraisals, comparable sales, and market values. More importantly, you’ll learn how these things can influence how much you can borrow when buying a home.
Relationship Between Appraisals, Comparable Sales, and Market Values
In a typical real estate transaction, a home buyer will make an offer on a home based on local market conditions and sales prices. The buyer’s mortgage lender will then order an appraisal to find out how much the property is worth so they can make an informed lending decision.
The appraisal can affect the home buyer in several ways. For one thing, it can determine the maximum amount the lender is willing to provide based on the estimated market value of the house.
These factors—appraisals, comparable sales, and market values—are closely related. They influence one another and can determine how smoothly the rest of the home-buying process will go.
We’ll get back to the relationship part of it in a moment. First, let’s cover the terminology used throughout this article:
A home appraisal is a professional assessment of the monetary value of a property. A certified appraiser will determine the value based on the property’s condition, location, and comparable sales in the area. In Washington, mortgage lenders typically order an appraisal to ensure they are not lending more than the home is worth.
Comparable sales, also known as “comps,” are recently sold homes in the same area with similar features to the home you’re looking to buy. Appraisers use comparable sales (among other things) to determine the fair market value of a home. By comparing these properties’ features, location, and selling prices, the appraiser can estimate the market value of the “subject property” being appraised.
In this context, market value refers to a property’s current worth or value based on local real estate market conditions. It represents the price a typical buyer would be willing to pay for the home based on recent sales trends in the area.
So, let’s discuss how those comparable sales play into this process and how it can affect you when buying a home in Washington.
How Appraisals, Comparable Sales, and Market Values Affect You When Buying a Home in Washington
In Washington, the appraisal process can vary slightly from one appraiser to the next. They each have their unique way of doing things. But it generally follows the sequence outlined below.
Step 1. The lender orders an appraisal.
When a buyer is interested in a property, their lender typically requires an appraisal to ensure its value supports the loan amount. The appraiser is an independent, certified professional who assesses the property’s condition, location, and other factors.
Step 2. The appraiser reviews comparable sales.
The appraiser uses comparable sales, or “comps,” to determine the appraised value of the property. These comps are recent sales of similar homes in the same neighborhood or nearby areas. The appraiser looks for properties with similar characteristics, such as size, number of bedrooms, location, and condition.
By comparing the subject property to these comps, the appraiser can gauge how the market has responded to similar homes and what the subject property might be worth.
Step 3. The appraiser makes “adjustments” as needed.
To determine the market value of the purchased property, the appraiser will assess how it stacks up against the comparable sales. If the subject property has features or conditions that are superior or inferior to the comps, adjustments are made accordingly.
For example, if the subject property has an extra bedroom compared to the comps, it may be valued higher. Conversely, if the property’s condition worsens, it could lead to a lower appraisal value.
What Does the Buyer Do During This Process?
As mentioned earlier, there’s not much for a Washington home buyer to do during the appraisal process. The mortgage lender will request it. The appraiser will coordinate with the homeowner to visit on-site and then deliver the finalized report to the lender.
All of this happens without direct participation or involvement from the home buyer. Buyers should understand how this process works since it can directly affect them.
If you make an offer on a house that is significantly higher than comparable sales, the appraisal might come in below the purchase price.
If your appraisal comes in low, there are a few things you can do:
Increase your down payment. If your appraisal comes in low, this will reduce the maximum loan amount you can take out on a mortgage. If you have extra funds available, consider making up the difference with a more significant down payment.
Renegotiate the purchase price. You should return to the table and show the seller the home’s appraised value. With this information, you can ask the seller to lower the selling price.
This may be the easiest way to deal with a low appraisal. If all goes well, the seller may agree to a reduced price to more closely match the value of the home based on the appraisal.
Request a new appraisal. Suppose you or the seller believe that the home’s appraised value needs to be revised. In that case, you may request a new appraisal by a newly appointed appraiser from the lender or another professional that you handpick yourself.
The appraiser may have made a mistake, or specific information was missed. Whatever the case, another appraisal may bring back a higher property value, or you may back out of the deal. While not ideal, you can walk away from the deal if the appraisal comes in too low. If you included a financing or appraisal contingency in your offer (which is highly recommended), you can use that clause to back out without repercussions.
If your lender doesn’t provide you with the mortgage you need due to an unfavorable appraisal, you can exercise your right to walk away from the deals as long as you have the right contingencies.
Here’s a helpful tip. Before entering the real estate market, spend some time doing your market research. Look at recent sale prices in the area where you plan to buy a home.
This research will help you make an intelligent, data-based offer when the time comes. It can also help you avoid overpaying for a home, which could lead to the low appraisal scenario mentioned above.
As you can see, there is a close relationship between home appraisals, comparable sales, and market values in real estate. Understanding this process can help you navigate the market and achieve your dream of homeownership.