Real estate appraisal is a critical process that plays a crucial role in determining the value of a property. Whether you are a buyer seeking a home loan or a seller looking to set the right price for your property, understanding the concept of real estate appraisal is essential. In this blog post, we will delve into the intricacies of real estate appraisal, its methods, and its impact on home loan applications. By the end, you will have a comprehensive understanding of why real estate appraisal matters in the world of real estate transactions.
What is Real Estate Appraisal?
Real estate appraisal, also known as property appraisal, is an unbiased and systematic process used to determine the true value of a property. While sellers may have a subjective bias that inflates the value of their property, buyers may undervalue it due to their preconceived notions. Real estate appraisal aims to establish a fair and objective contract price that satisfies all parties involved—the buyer, the seller, and the bank.
Property Appraisal Methods
Real estate valuers employ two primary methods to determine the market value of a property: the sales comparison method and the cost approach.
Sales Comparison Method: This method involves comparing the quoted price of the property under consideration with recent transactions of similar properties in the neighborhood. Appraisers gather this information from sources such as sales deed registration data, multiple listing service databases, and third-party websites.
Cost Approach: In the cost approach, appraisers estimate the current value of the property by calculating the cost required to rebuild it from scratch in the event of its destruction. The value of the land is then added to this cost to arrive at the final property value.
How Do Home Appraisals Work?
When you apply for a home loan, the bank sends technical and legal experts to physically examine the property and prepare an appraisal report. This report takes into account various factors such as the size, age, location, structural status, construction quality, and market trends of the property. The appraiser also considers the prices of similar properties in the vicinity, the value of improvements, and the expected lifespan of these improvements.
Additionally, the appraiser assesses rental prices and predictable expenses associated with similar homes. It is important to note that while the overall condition and maintenance of the property are important, they do not directly impact its valuation. However, they can reflect the property's structural integrity, which may influence the appraiser's assessment.
Who Pays for Property Valuation?
While banks hire independent and recognized property appraisers to conduct property valuations, the cost is typically borne by the borrower. This cost is usually charged as a flat fee labeled "legal and technical valuation." While the exact charges may vary from bank to bank, they generally range from Rs 5,000 to Rs 10,000.
How Does Property Appraisal Impact Your Home Loan Application?
The value determined through the property appraisal process has a direct impact on your home loan application. Based on this value, the bank decides the percentage of the value it is willing to lend you, taking into consideration factors such as the loan-to-value ratio and your repayment capacity. In India, most banks offer home loans of up to 80% of the appraised property value. For instance, if the appraised value of the property is Rs 1 crore and the bank has an 80% loan-to-value ratio, you would be eligible for a home loan of Rs 80 lakhs, while the remaining amount would need to be arranged from your own sources.
How Does Property Appraisal Help Home Buyers?
While purchasing a home can be an emotional decision, it is crucial to approach it with a rational mindset. Buyers may sometimes be inclined to pay more than the property's actual worth due to their strong desire for the property. However, financial institutions adopt a no-nonsense approach by using property appraisals to evaluate the property objectively. If the asking price exceeds the property's appraised value, it is not advisable to proceed with the transaction. In such cases, buyers should negotiate with the seller to lower the price to a fair value. If the seller is unwilling to do so, it is in the buyer's best interest to walk away from the deal. Financing such an overpriced property with personal funds would only perpetuate overvaluation, leading to potential financial losses when trying to sell the property in the future.
What if You Are Not Satisfied with the Appraised Value?
In cases where the seller believes that the previous appraisal contained errors or failed to capture key aspects of the property, they can request another evaluation from the bank. However, the seller is responsible for bearing the cost of this second appraisal. During the re-evaluation process, the bank will maintain the status quo on the borrower's home loan application.
General Tips for Buyers and Sellers
Both buyers and sellers can benefit from analyzing past property transactions in the area. This helps sellers set a reasonable price for their property, while buyers gain insights into the local property market, minimizing the chances of misinformation from sellers or brokers.
When the bank sends its legal and technical valuation team to conduct the property appraisal, both the buyer and seller should be present. The seller must provide all relevant property-related documents to facilitate the appraiser's assessment.
It is important for sellers to set an asking price that aligns with the market rate to increase the likelihood of closing the deal quickly. Similarly, buyers should avoid paying more than the property's fair market value to avoid overpaying for an asset that may not retain its value.
What if the Deal Falls Through?
Before submitting a home loan application to the bank, buyers and sellers typically sign an agreement to sell. This legally binding document outlines the terms and conditions of the transaction. To safeguard the buyer's interests, it is advisable to include a clause stating that the deal will only proceed if the bank approves the loan as requested. This clause provides clarity and ensures that the buyer is not financially burdened in case the bank rejects the loan application or appraises the property at a significantly lower value than expected.
In conclusion, real estate appraisal plays a pivotal role in determining the value of a property in a home loan application. By employing objective methods such as the sales comparison method and the cost approach, appraisers assess various factors that influence a property's worth. The appraised value directly affects the loan-to-value ratio and the amount of loan a bank is willing to provide. It is crucial for buyers and sellers to understand the significance of property appraisal to make informed decisions during real estate transactions. By relying on accurate appraisals, buyers can avoid overpaying for a property, while sellers can set a fair asking price that ensures a smooth transaction.
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