A home appraisal is a third-party opinion of the market value at a specific point in time, meaning what is the most probable price a willing buyer would pay for a specific property.
The appraised value of a home is based on an analysis of the property’s condition and the most recent sales for similar homes. Home appraisals are required if you are getting a mortgage and are to help the lender and the buyer ensure that they are investing their money in an asset that will be "worth" the price they are paying.
The appraisal comes a bit later in the process after inspections are completed and inspection agreements are finalized. Because this happens later, the appraisal risk to the seller remains a longer range risk if the sales contract has a financing and/or appraisal contingency. The typical financing contingency timeline is around 30-45 days. That means that there is still a contingency on the home closing that runs over a month after the purchase contract is signed. This is one of the reasons that cash deals tend to be more attractive to sellers.
Lenders will always seek an impartial appraisal before they can issue a mortgage. This is done to ensure an accurate market value estimate of the property and to protect the consumer from an inflated sales price. In the event of foreclosure, appraisal guarantees that the lender can repossess the property and sell it back on the market to make back their initial investment of the loan. By initially financing an appropriate amount, mortgage lenders can rest assured that their money will be made back.
What do home appraisers look for?
Usually, the appraiser bases the estimated value of a home on in-depth research taking factors such as site-inspections, amenity/features, condition, quality and sales of similar properties into consideration. The appraisal is based on a "look-back" at home sale prices of similarly situated properties. Because of this look back into closed sales, appraisals values can sometimes lag in a market that has recently pivoted.
Your appraiser’s report often includes a detailed description of several factors surrounding the property:
Interior and exterior condition
Room count
Improvements, repairs and renovations
Plumbing and electricity
Age of the structure
Local market trends
Condition of surrounding properties
Indoor elements such as square footage, quality of construction and recent upgrades also may contribute to a home appraisal report.
These reports involve a thorough review of the property's overall quality, condition, and amenities/features to determine whether the listed price for the home is appropriate. Lenders require a clear picture of the appraiser’s opinion of value as well as the property’s current condition. Market conditions and recent economic trends also factor heavily in these final estimates.
How much does an appraisal cost?
The cost of an appraisal is covered by the buyer and is usually a few hundred dollars. These fees are typically included in the loan’s closing costs, as the mortgage lender will order the appraisal. The appraiser should not only be licensed, certified and qualified, but also familiar with the surrounding area. Occasionally, appraisers may come from outside the area. If this happens, we strongly encourage you to push back on the lender to find an appraiser from your immediate area who is more likely to be more familiar with market activity and home values.
The appraisal industry is heavily regulated at the State and Federal levels. Appraisers are also required by law to be impartial, unbiased, compliant with Fair Housing Laws and free of any interest in the transaction’s outcome.
What happens when an appraisal is too low?
The appraised value can sometimes be less than the seller’s asking or contract price. In this case, the lender may adjust their approved lending amount to take this value into consideration. For example, if the lender was prepared to offer to loan the buyer 80% of the purchase price, they may not amend that to be 80% of the appraised value, which would require the buyer to contribute more cash at closing to make up the difference.
The buyer may be able to negotiate a lower price to match the estimated value. A motivated seller may agree to an adjusted price or seek a second evaluation. In a seller's market, they may be less motivated to adjust the purchase price and the buyer will need to make a decision. Make sure you are aware of what your contract allows in terms of contractual options for terminating before making your final decisions to ensure that you understand if your earnest deposit is at risk.
When the seller or buyer suspects inconsistencies with the original appraiser’s report, a fact-based case for amendment may be submitted to the original appraiser who may revise their initial evaluation in response. If the buyer or seller feel the appraiser’s response is deficient, they may request the lender review the response to consider allowing a second appraisal.
Based on the seller’s desire to renegotiate or seek a second opinion, a less than expected appraisal will likely delay closing. At this point, buyers and lenders will be less willing to move forward with an offer due to frustration over delays.
What hurts a home appraisal?
The two most common factors that can hurt a property appraisal usually involve the home’s condition or a downtrending local market.
Home’s condition - Keeping the up curb appeal of the property is important to bringing in buyers, but an appraiser will find any issues that go deeper than an unkempt lawn.
If the appraiser finds plumbing issues or unresolved structural damage, the value can drive down considerably. Even a home in an area with good economic prospects can see its value fall if the prospective buyer needs to pay for repairs after moving in.
Neighborhood value - Market considerations that are out of a homeowner’s control, such as recent sales or foreclosures of nearby homes, can drive down a property’s value. Sellers can augment this downturn by demonstrating to the appraiser that the property is in better condition or has additional features, unlike the surrounding homes.
How to prepare for a home appraisal
If you’re planning to sell or refinance your home, there are a few steps you can take to prepare for your property appraisal and get the highest value estimate possible. Freshening up the home’s exterior with a new coat of paint can boost curb appeal and possibly increase the value of the home.
Taking care of your lawn and backyard, as well as making any outdoor improvements to your property can weigh on the appraiser’s estimate while also making the home more appealing to buyers. Upkeep on the home’s interior is also an important factor for appraisals. By keeping a clean home and making necessary repairs beforehand, you can avoid any cosmetic or expensive problems from being included on the appraiser’s report. Ultimately, the appraiser is responsible for finding issues with the home and will likely uncover problems that go deeper than how the property looks.
Having a qualified and knowledgeable real estate professional as you partner will help you anticipate and plan for potential appraisal issues.