One of the most nerve wracking parts of a real estate transaction can be the appraisal process for both buyers and sellers. What is an appraisal? Why is an appraisal necessary? How much does it cost? What if the home doesn’t appraise for the contract value? There are many questions and concerns surrounding real estate appraisals, and rightfully so, but there are several things to know and things that can be done to prepare for a successful and low stress appraisal experience.
Definition of Appraisal
The first thing to know in this process is what is an appraisal?
“An appraisal is a licensed appraiser's opinion of a home's market value based on comparable recent sales of homes in the neighborhood.” - redfin.com
An appraisal is a document compiled by the licensed appraiser only- a similar process can be followed by a real estate agent but is referred to as a BPO (broker’s price opinion) and are not accepted by lenders to qualify homes for loans.
Some people confuse a real estate appraisal with a home inspection. An inspection an investigation of a home by a licensed inspector. The object of an inspection would be to determine any material defects or necessary repairs that need to be made prior to the closing. An appraisal is seeking value.
Why Do You Need An Appraisal?
The main reason an appraisal is necessary in a real estate transaction is that the lender requires a valuation of the property they are loaning money on so they are not overpaying out for the property. The bank doesn’t want to overpay for a property even if a buyer is willing to do so. Thinking from the bank’s perspective; if the loan were to default they need to make sure that they get their money back if they were to sell the property themselves.
Other circumstances that could require an appraisal include refinancing a mortgage, estate planning, estate settlement, tax assessment review, tax advice and/or dispute resolutions.
How Much Does An Appraisal Cost?
Generally an appraisal runs between $250-$500. Factors that can affect the price of getting the appraisal completed are square footage, location and the complexity of the job.
Because the appraisal is ordered by the lender for the borrower’s loan, the borrower pays for the appraisal. One question many have on the appraisal is who gets to see it? The borrower is financially responsible for the appraisal, therefore they have the final say on who gets to review the appraisal beyond the lender. This means that the seller does not necessarily get to see the appraisal even though it is done on there home, the seller is at the mercy of the buyer in this case.
What Is The Appraisal Process
- Before there is a contract, a buyer should get pre-approval for a loan to understand how much money they will be able to borrow towards purchasing a home
- An offer is made, negotiated and eventually accepted by both buyer and seller and a purchase and sale agreement is signed.
- Following the accepted contract is the period for completing due diligence this could include inspections, securing financing, etc. At this time the contract will be sent to the bank the buyer will be using to borrow funds
- The lender receives the contract and orders an appraisal. Generally the bank uses an appraisal management company who will then hire an appraiser to do the job.
- The appraiser schedules a time for his inspection and when the appointment comes he does a walk through of the home and lot.
- Using the information gathered on site and comparable sales in the area the appraiser will compile a document which gives his or her opinion of the monetary value of the home and submit it to the bank who will distribute it to the buyer.
How Do Appraisers Price Homes?
During their visit to the home the appraiser looks at a few key items to help make their decision on value. These include:
- Square Footage
- # Bedrooms
- # Bathrooms
- Upgrades or Updating
- Lot size and desirability
- Exterior Condition
- Interior Condition
- Construction Type
- School District
- Any Unusual Factors
The appraiser will compute a numerical value using a check and balance system comparing the principal property in question to various comparable sales. For example if the principal property was a 3-bedroom, 1-bath home and the appraiser found a similar home and lot that sold in the area that was 3-bedrooms and 2-baths, they would adjust the price to take into account the lack of second bathroom in the principal home.
Some people believe that the value of a home is only based on the physical home itself and that is simply untrue in the world of real estate. A high quality home in a low quality neighborhood is going to be worth less than the same home in a nicer neighborhood, and the appraiser will take that into account when preparing their document.
How To Prepare For An Appraisal (As The Seller)
When the value of your home is being determined by the appraiser you want it to be in the best condition possible. As previously discussed, there are money amounts added and taken away from your property when the appraiser is comparing it to others. If the home that sold was in spotless condition with all working windows and doors and first class safety precautions and the one for sale is the same kind of home but is very messy, has a cracked window, a door that sticks and is missing smoke detectors, these are all things that will lower the value of your home in the appraisers eyes. Most appraisers have a number in their head that they use when deducting for small imperfections (usually it’s about $500). Most small fixes will cost you much less than $500 each to remedy and will keep the value of your home going in the right direction for a sale. The following is a list of things to do before your appraisal to ensure the highest marks.
- Clean up your home and yard
- Make small repairs to make the home appear well-maintained
- Address health/safety concerns (detectors, etc) FHA loans have requirements in this area- save time and just get them done beforehand
- List any repairs, updates or renovations (roof, windows, upgraded HVAC, finished basement, kitchen remodel, bath remodel, etc) These impact effective age of home and add value.
- Ensure the whole house is accessible
- Share map or survey if available
- Make sure your agent attends to best represent you and your property
- Make the inspection process as easy as possible for the appraiser- they are human and a pleasant experience can go a long way.
What Happens If The Property “Doesn’t Appraise?”
Should the appraisal come back and the value is lower than the purchase price there are a few options before the deal completely falls apart. Here are a few things you and your agent can discuss before you throw in the towel.
- Look for errors. Appraisers are just like the rest of us and mistakes do happen. Be sure the addition and subtraction of dollar amounts make sense to both you and your agent (if you are the borrower). Have your agent check the comps and be sure they all makes sense
- Bring more money to closing. Just because the property doesn’t appraise for the amount the bank wants doesn’t mean the borrower can’t purchase the house, it just means they will only be approved for a certain amount through the bank. If they can come up with the difference in dollar amount the sale can still go through.
- Extend the closing date. Related to number two above, you may be able to extend the closing date which could give you enough time to come up with the extra money needed.
- Renegotiate the contract. If both buyer and seller want to proceed with the deal the price can be changed to fall within the parameters of funding limits.
It is important to point out in this circumstance how crucial it is to property price a home for sale from the beginning. Cash buyers that will decide against an appraisal cannot be counted on, therefore the property needs to be priced in a reasonable manner based on the same criteria an appraiser would use. A real estate professional should create a comparative market analysis (CMA) for their clients to be sure pricing of a home is done correctly.
Be Smart, Be Ready and Ace Your Appraisal by Joe Boylan
How to Prepare For a Real Estate Appraisal by Bill Gassett
Real Estate Glossary by Redfin.com