Appraisals: What They Are and Why They Matter in the Homebuying Process

When buying or refinancing a home, one key step in the process is the home appraisal. This professional assessment of a property's value plays a crucial role in determining how much a lender is willing to finance. Whether you're a buyer, seller, or homeowner, understanding appraisals can help you navigate the process with confidence.

What Is a Home Appraisal?

A home appraisal is an unbiased, professional evaluation of a property's market value. Conducted by a licensed appraiser, the assessment considers factors such as:

The home's size, layout, and condition
Recent sales of comparable properties (comps) in the area
The home’s location and surrounding market trends
Any upgrades or renovations that may impact value

Why Are Appraisals Necessary in the Homebuying Process?

For buyers, an appraisal is critical because it confirms whether the home's price aligns with its actual value and most importantly, lenders require appraisals to ensure they are not lending more than a home is worth. This helps mitigate their risk for both parties and ensures buyers are paying a fair price. If an appraisal comes in at or above the agreed-upon purchase price, the transaction can move forward smoothly (and the buyer has gained instant equity!!) However, if the appraisal is lower than expected, it can create challenges...lenders will only lend the lesser of the two values of purchase price and appraisal value.

What Happens if an Appraisal Comes in Low?

A low appraisal can complicate a home purchase or refinance. Here are a few common scenarios and potential solutions:

Renegotiation: Buyers can request that the seller lower the price to match the appraised value. Many sellers agree to this, especially in a balanced market.
Buyer Covers the Difference: If the seller won’t lower the price, the buyer can pay the difference between the appraised value and the agreed-upon purchase price out of pocket.
Dispute the Appraisal: If the buyer or seller believes the appraisal is inaccurate, they can request a reconsideration by providing additional comparable sales or evidence that supports a higher value.
Switch Lenders or Get a Second Opinion: While not always an option, some buyers seek a new appraisal from a different lender, hoping for a different valuation.
Walk Away: If an appraisal contingency is in place, buyers can opt to back out of the deal without penalty if they can't resolve the price gap.

How Appraisals Impact Baltimore Buyers and Sellers

The Baltimore real estate market is unique, with distinct differences between neighborhoods. A rowhome in Hampden may appraise differently than a detached home in Hamilton, even if both are priced similarly. Some key factors affecting appraisals in Baltimore include:

Rapid Shifts in Market Values: Certain areas, like Remington and Brewers Hill, have seen sharp price increases due to revitalization efforts, but appraisals may lag behind actual market demand.
Property Condition Disparities: Many older Baltimore homes vary greatly in renovations. A home with modern updates in Canton may appraise significantly higher than a nearby home with outdated features, even if they have the same square footage.
Limited Comparable Sales: In neighborhoods with fewer recent sales, it can be challenging for appraisers to find accurate comps, sometimes leading to more conservative valuations.

Final Thoughts

Home appraisals are a critical checkpoint in the real estate process, protecting both buyers and lenders from overpaying for a property. While a low appraisal can be frustrating, there are several ways to navigate the situation. Understanding the role of appraisals can help buyers and sellers prepare for potential hurdles and make informed decisions.