What are home appraisals?
A residential appraisal is an unbiased 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 similar home sales. Appraisal happens after an initial offer is accepted and is one of the first steps towards closing the sale of a home.
As a later phase of your mortgage approval, appraisal can be a nerve-wracking moment for both buyers and sellers. Awaiting final approval from an impartial third party can be stressful, especially when the outcome determines your future mortgage payments for years to come.
Usually, the appraiser would base 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.
What do home appraisers look for?
Once the decision has been made to move forward and an offer is accepted, the lender will schedule an appraisal on the home.
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.
Your appraiser’s report will include 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. If the appraised value comes back less than the listed price, the sale can be renegotiated or cancelled altogether.
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. 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.
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?
While uncommon, the appraised value can sometimes be less than the seller’s asking or contract price.
In this scenario, the buyer and mortgage lender 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.
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?
A lower than expected appraisal means the home’s price may need to come down to secure a sale; see the previous section. Buyers and their lenders will not be willing to make an agreement based on an inflated price and may back out of a sale if an original price turns out to be inaccurate.
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.
In conclusion
Appraisal is an essential step in the mortgage process as it ensures the amount being paid by the borrower and lender is true to the value of the home. Understanding what appraisers look for and the fees associated with the process benefit both the buyer and seller by getting the most out of the real estate transaction.
While appraisal fees are settled at closing of the sale, they are not the only closing cost that must be paid at this stage. Insurance premiums, homeowners insurance, property taxes and other fees will all factor into the price of closing a mortgage.