How to Properly Read a Property Appraisal

When it comes to buying or selling a property, one of the most critical documents you'll encounter is the property appraisal report. A property appraisal document provides an expert assessment of a property's value, which is can be a key part of buying or selling a home. While these documents may seem complex at first glance, interpreting them doesn’t have to be overwhelming. In this guide, we break down the key components of a property appraisal and examine how to properly read and interpret it, in order to increase your odds of success.

Property Appraisal: An Overview

A property appraisal is a detailed report prepared by a licensed appraiser that provides an estimated value of your property. This value is determined based on various factors, including the property's physical characteristics, location, comparable sales in the area, and market conditions.

Property appraisals are crucial to most real estate transactions for several reasons:

1. Pricing: Sellers use appraisals to set a competitive and fair asking price for their property. Buyers can rely on them to determine if the asking price aligns with the property's actual value.
2. Financing: Lenders require appraisals to ensure they are not lending more than the property is worth. This protects both the borrower and the lender from overvaluing the property.
3. Taxation: Property tax assessments often depend on the appraised value. A higher appraisal could lead to higher property taxes.
4. Insurance: Homeowners use property appraisals to determine the appropriate amount of insurance coverage needed for their property.

Property appraisals also play a significant role in the mortgage approval process. Mortgage lenders use property appraisals to assess the value of the property being used as collateral for the loan. The outcome of the appraisal can have several implications for your ability to get approved for a mortgage.

Firstly, the appraised value of the property directly affects the maximum mortgage amount you can qualify for. Lenders typically lend a percentage of the property's appraised value, up to a certain limit. A lower appraised value might result in a lower approved mortgage amount. If the appraised value falls short of the desired mortgage amount, you might need to make up the difference with a larger down payment to secure the mortgage you're seeking.

Furthermore, If the appraised value of the property is lower than expected, it can result in a higher LTV ratio. The loan-to-value (LTV) ratio is a crucial factor in mortgage lending. It represents the percentage of the property's appraised value that the lender is willing to finance. Lenders typically have maximum LTV ratios that they are comfortable with, and these ratios can vary based on factors like the type of mortgage and the borrower's creditworthiness.

Finally, lenders often base interest rates and mortgage terms on the perceived risk associated with the loan. A property appraisal that comes in lower than expected might be interpreted by the lender as an increased risk.In some cases, a lower appraised value could lead to higher interest rates or less favourable mortgage terms. This can affect your monthly payments and overall affordability, potentially impacting your mortgage approval if the new terms make the loan less manageable based on your financial situation.

How to Interpret Property Type, Size, and Age in an Appraisal

The first section of a property appraisal typically contains information about the property's type, size, and age. Understanding these details is crucial as they lay the foundation for the appraiser's assessment of the property's value.

1. Property Type:
   The property type section describes whether the property is a single-family home, condominium, townhouse, or another type of dwelling. This information is essential because different property types have varying market values.
   Interpretation Tip: Consider how the property type aligns with your needs and expectations. For example, if you're looking for a spacious family home, a single-family residence might be preferable to a condominium.
2. Property Size:
   Property size includes the total land area and the size of the building, usually measured in square feet or square meters. This information influences the property's value, with larger properties typically having higher appraised values.
   Interpretation Tip: Assess whether the property size meets your requirements. If you're planning to expand in the future, ensure the property has sufficient land or building space for your needs.
3. Property Age:
   The age of a property can significantly impact its value. Older properties may have historical charm, but they can also require more maintenance and upgrades.
   Interpretation Tip: Consider the property's age in relation to your budget and willingness to invest in potential renovations. A newer property might require fewer immediate repairs.

Now that we've covered the basics of property type, size, and age, let's move on to another critical aspect of property appraisals.

Analyzing Annual Taxes and Title Details in Property Appraisals

Once you've examined the property's physical characteristics, it's time to dive deeper into the financial and legal aspects of the appraisal.

1. Annual Taxes:
   The property appraisal often includes information about annual property taxes. This figure can significantly impact your ongoing costs as a homeowner.
   Interpretation Tip: Calculate whether the annual property taxes fit comfortably within your budget. High property taxes can make a seemingly affordable property less so in the long run.
2. Title Details:
   Title details in an appraisal can reveal vital information about the property's ownership and any potential issues with the title. This section should specify whether the property has a clear title or if there are any liens, easements, or other encumbrances.
   Interpretation Tip: Pay close attention to this section, especially if you're considering purchasing the property. A clouded title can lead to legal complications and potentially affect the property's value.
3. Comparable Sales:
   Property appraisals often include information about comparable sales in the area. These are recently sold properties with similar characteristics that help the appraiser determine the subject property's value.
   Interpretation Tip: Review the comparable sales section to gauge the accuracy of the appraiser's valuation. If the appraised value significantly differs from recent sales of similar properties, it may warrant further investigation.
4. Market Conditions:
   Appraisals also consider the current real estate market conditions. The appraiser may note whether it's a buyer's or seller's market, which can impact property values.
   Interpretation Tip: Be aware of the market conditions and how they may affect your buying or selling strategy. In a seller's market, you might expect higher prices, while a buyer's market may offer more negotiation room.

While property appraisals can be understood and interpreted more easily than you might expect, you do not have to go about this process alone. If you are conducting a property appraisal as part of your home-buying process, a Clover Mortgage broker can help you every step of the way. Our team has decades of experience and a tight network over 60 different lenders. Regardless of the results of your appraisal, we can help you find the best terms and the lowest rates available to you. Contact us to get started with a free consultation today!