Statistics show that most home buyers in California use mortgage loans when buying a house. That means most buyers will have to go through the home appraisal process at some point. It’s a standard requirement whenever a mortgage loan is being used.
Today, we’ll address a common question relating to appraisals. How do home appraisers in California determine the value of a house?
The short answer is, they compare each property to similar homes that have sold recently in the same area (subtracting or adding value as needed). Based on this evaluation, the appraiser will determine an estimate value for the home.
How Do Home Appraisers Determine Value?
A home appraisal is a formal evaluation of a property to determine its current market value.
This evaluation usually takes place shortly after the buyer and seller have agreed on a sale price.The buyers would then give their lender a copy of the purchase agreement, and the lender would order an appraisal to be completed.
But what does the appraiser actually do? How does he or she determine the current market value of the home? Here are some of the common practices and techniques used during an appraisal:
- The appraiser will look at tax records to see the sale history of the home, if applicable.
- She/he will look at the tax assessor’s current assessment of the property, which is the value assigned for tax purposes.
- The appraiser will also look at comparable sales or “comps.” These are similar homes that have sold in the same area over the last few months.
- The appraiser will view the property inside and out, making note of any value-adding features. These are upgrades and improvements that might add value to the house. Outdoor living space (decks, patios) and kitchen upgrades are common examples.
- The appraiser will also consider any unique features of the property, such as a waterfront view or a larger lot — anything that might make the house worth more than the comps.
- In some cases, the appraiser might not actually visit the home in person. Instead, he or she might perform what’s known as a “desktop appraisal,” using only digital data to determine the value.
- If an on-site visit is performed, the appraiserwill probably drive through the neighborhood to look at the other houses that have sold recently. This makes it easier to compare them to the home that’s being appraised.
Based on all of this research, a California home appraiser will come up with an appraisal amount for the property. This is the amount he/she thinks the property is worth in the current market. This report is provided to the buyer’s lender, who will then make a lending decision based on the information.
Possible Outcomes After the Appraisal
In California, home appraisals can result in two possible outcomes:
The appraiser might determine that the property’s market value is equal to, or greater than, the amount the buyer has agreed to pay. In that case, the loan can move forward.
Alternatively, the appraisal could “come in low,” meaning the appraiser has determined the house is worth less than the agreed-upon purchase price.
If the home appraises for less than the amount offered, the buyer and seller will have some decisions to make:
- The seller could lower the asking price to meet the appraisal, so that the buyer’s mortgage loan can go through and the deal can continue.
- The buyer could pay more out of pocket, to make up for the difference.
- The buyer could simply walk away from the deal, possibly by using an appraisal contingency to protect their deposit.
In some cases, the seller will lower the asking price to reflect the appraisal. But not always. If the seller refuses to do this, the buyers will have to decide whether they want to pay the difference or simply walk away.
Note: This article explains how California home appraisers determine the market value of an individual house, and is based on common industry practices. But in reality, every home-buying scenario is slightly different. Variations can occur from one sale to the next. As a result, portions of this article might not apply to your particular situation.
Mike Trejo
Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.
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Absolutely, the appraisal process in California is a pivotal step in the home buying journey, especially for those seeking mortgage loans. Home appraisers employ several techniques and practices to determine a property's market value accurately. Let's break down the concepts and practices discussed in the article:
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Home Appraisal Process: It's a formal evaluation to determine the current market value of a property.
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Role of Comparables: Appraisers heavily rely on comparing the property with recently sold similar homes (comps) in the same area to estimate value. Adjustments are made for variations between the subject property and the comps.
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Data Sources: Appraisers delve into various data sources:
- Tax Records: Examining sale history and tax assessments of the property.
- Comparable Sales: Analyzing similar homes recently sold.
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Property Inspection: Appraisers conduct thorough inspections, inside and out, noting upgrades or unique features that can add value (e.g., improved kitchens, outdoor spaces, unique views).
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Desktop Appraisal vs. On-Site Visit: Appraisers may perform desktop appraisals using digital data or conduct on-site visits, physically examining the property.
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Neighborhood Analysis: They might drive through the neighborhood to evaluate other recent sales and compare them to the subject property.
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Appraisal Outcomes: Appraisals can result in two main outcomes:
- Property value meets or exceeds the agreed purchase price, allowing the loan to proceed.
- Property value comes in lower than the agreed price, leading to negotiation between buyer and seller:
- Seller may lower the price.
- Buyer may cover the difference or walk away using an appraisal contingency.
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Variability: Each home-buying scenario is unique, so the appraisal process can vary from one sale to another.
Mike Trejo, a mortgage broker in the Bay Area, offered insights based on industry practices. His experience aligns with the intricacies of the appraisal process, including its impact on California home buyers, lenders, and sellers. The article also touches on other topics relevant to the California housing market, such as hard money loans, home insurance, and first-time buyer queries, reflecting Trejo's diverse expertise in real estate matters.
