What Is an Appraisal Fee for Buying a House?

When financing a home, lenders will require that a homeowner have an independent appraisal ordered on the property. Appraisals are important as they are independent assessments of a property's value. If you are paying more for a home than it is worth, it will take longer to build equity in the home, and it becomes a higher risk to a lender in the event of default. When purchasing a home, it's important to understand the appraisal process, the fee for an appraisal and why this is important.

History

Prior to appraisals becoming part of the home-buying process, home sellers could place whatever value they wanted on a property based on their own assessment of what they thought their home was worth. There was no accountability for pricing, other than home sellers trying to fetch the highest price possible for their property and maximize their profit. High home prices became commonplace. However, as more and more homeowners were defaulting on mortgages and facing foreclosure, banks were losing more and more money in homes that were financed for more than what they were worth. At this point, the appraisal process became important in the home-financing process to protect the interest of banks and home buyers, which also creates stability in a down market.

Significance

Appraisals are more of an art than a science. The appraisal is made up of several elements: comparable properties in the immediate area that are currently for sale, comparable properties in the immediate area that have sold in the last three to six months, and any notable improvements to a property being appraised that would add to or detract from its value. The most important element among these are properties that have been sold in an immediate area over the past three to six months, as this determines the market value on a property, or what the buying public is willing to pay to live in a certain area. The market value of a property is the determining factor of what a house is actually worth.

Function

The function of an appraisal is to verify factors about the property in relation to improvements and square footage. From there, the appraiser will research properties most similar to the subject property being appraised in relation to square footage and improvements. Values of properties are assessed on a price per square foot basis, so it is important these measurements be accurate and up to date in order to obtain an accurate assessment. Should a home appraise for less than what a buyer is offering to pay for it, the buyer is not obligated to purchase the home unless the seller drops the price of the home, or unless the buyer is willing to front the difference of the appraisal and sales price in cash at closing.

Cost

Appraisal fees vary based on the size and price of a property. A typical appraisal fee is around $350 to $500, which can either be paid at closing or prior to closing, depending on lender requirements. This fee is usually paid by the buyer of a property as a condition of approval from their lender in order to obtain a home loan.

Misconceptions

Many home buyers believe that having an appraisal come back for less than what they have offered to pay for the house will guarantee them a lower sales price by forcing the seller to lower the price of the property to meet the terms of the appraisal. However, sellers are not obligated to lower the sales price in this situation, just as the buyer doesn't have an obligation to buy the property if the appraisal is less. Most commonly in this situation, a new appraisal will be ordered by the seller, in which case, the property value will typically wind up being closer to what they are asking for a sales price. If it does not, and the seller refuses to lower the sales price, the buyer can either pay the difference of the appraisal and sales price in cash, or walk away from the home.

References

• Home Appraisal