A home appraisal is a critical part of any real estate transaction involving mortgage financing. Both home buyers and sellers should understand what an appraisal is, why it’s needed, and how the process works. This guide breaks down the key aspects of home appraisals to help you navigate this important step when buying or selling a home.
What is a Home Appraisal?
A home appraisal is an independent, professional valuation of a property’s market value. Appraisals are typically required by mortgage lenders any time a buyer utilizes financing to purchase a home.
The purpose of an appraisal is to protect the interests of the lending institution by ensuring the home is worth at least the amount being lent to the buyer. This helps minimize the lender’s risk in case the borrower defaults on the mortgage.
Appraisals may also be needed for homeowners seeking to refinance their mortgage or obtain a home equity loan. The appraised value determines the amount of money the lender is willing to loan against the equity in the home.
READ ALSO: 10 Negotiation Tips for Real Estate Purchase Contracts
Why are Appraisals Required?
For the mortgage lender, an appraisal serves several key functions:
- Determines property value – Confirms the fair market value of the home so the lender does not over-lend.
- Verifies purchase price – Makes sure the buyer isn’t overpaying beyond the property’s actual value.
- Assesses risk – Helps the lender evaluate the overall risk of providing mortgage financing.
- Protects investment – Ensures the property serves as sufficient collateral to secure the loan in case of default.
Home appraisals became a standard lending requirement in the 1930s after the Great Depression, when many borrowers defaulted on mortgages worth more than their homes. Appraisals help prevent this problem today.
READ ALSO: 10 Negotiation Tips for Real Estate Purchase Contracts
Who Orders the Appraisal?
The mortgage lender will order the home appraisal once a buyer’s offer has been accepted by the seller and a purchase contract signed.
In some cases, pre-approvals and pre-qualifications may include an appraisal, but full appraisals are usually not completed until the buyer is under contract on a home.
The lending institution selects an appraiser to inspect the property and provide an objective valuation. The buyer typically pays for the appraisal as part of the closing costs.
How Much Does an Appraisal Cost?
Appraisal fees are based on the size and sale price of the home, as well as the appraiser’s level of experience. Costs typically range from $300-$600 on average. High-value homes or complex appraisals may cost more.
Once the appraisal is completed, federal law requires that a copy of the report be provided to the borrower free of charge. This must occur at least three days before the closing date.
What is Included in an Appraisal Report?
The appraisal report will include detailed information about the property and the valuation methodology used. Key components are:
- Property details – Age, size, bedrooms/bathrooms, construction materials, condition, amenities, exterior and interior photos.
- Appraiser’s observations – Description of any deficiencies, needed repairs, functional or safety issues observed.
- Comparable sales data – Details of recent sales of similar homes in the neighborhood used for value comparison.
- Appraiser’s value opinion – Final fair market value determination with rationale based on research and analysis performed.
- Location map – Overhead map displaying the property in relation to comparables and surrounding neighborhood.
Appraisers may use the standard “Uniform Residential Appraisal Report” format that includes these sections.
Who Performs the Appraisal?
A professional, third-party appraiser will be selected by the lender to evaluate the property. Appraisers must be state licensed or certified to perform appraisals for federally regulated mortgage transactions.
It’s important for appraisers to remain impartial with no vested interest in the home’s value. Appraisers also carry special insurance for liability protection.
Check that your appraiser is properly qualified. Their state license or certification should be displayed on the appraisal report.
What’s the Appraisal Process?
The appraisal process typically follows this sequence of events:
1. Lender orders appraisal
After home contract is signed, the lender engages an appraiser.
2. Appraiser inspects property
Appraiser will evaluate home’s interior, exterior, and neighborhood.
3. Appraiser researches comparable sales
Recent sales of similar nearby homes are analyzed.
4. Appraisal report is prepared
Appraiser completes detailed appraisal report with valuation opinion.
5. Appraisal report is reviewed
Lender reviews appraisal to ensure standards were followed.
6. Report provided to borrower
Copy of appraisal report is sent to borrower at least 3 days before closing.
7. Appraised value determines loan amount
Lender will base mortgage amount on the appraised value of home.
The typical appraisal takes 1-2 weeks from start to borrower receipt of the report. More complex appraisals may take longer.
READ ALSO: How to Start Investing in Real Estate With Little to No Money
How Does an Appraiser Determine a Home’s Value?
There are three main valuation methods an appraiser may utilize:
Sales comparison approach – Compares recent sales of similar homes, often the most relied upon method.
Cost approach – Calculates current construction cost of the home minus depreciation.
Income approach – Values property based on the rental income it could generate.
The appraiser will research factors like:
- Square footage
- Number of bedrooms/bathrooms
- Age and condition
- Layout and amenities
- Basement and lot size
- Improvements and upgrades
- Location and neighborhood
They will then determine which valuation method, or combination of methods, is most appropriate. Adjustments are made to compare the subject home with recent sale prices of similar comps in the area.
This data analysis results in the appraiser’s concluded opinion of value.
What if the Appraisal is Lower Than the Purchase Price?
It’s not uncommon for an appraisal to come in below the agreed upon price between a buyer and seller.
If the appraised value is at least equal to the purchase price, the transaction can proceed as planned without issue. However, a low appraisal can threaten the deal.
For conventional loans, the lender is only permitted to provide a mortgage for the appraised amount. The buyer must make up the difference in cash if they wish to continue with the purchase at the higher price.
The buyer does have options in this scenario:
- Renegotiate with seller – Ask the seller to lower the price to the appraised amount.
- Bring extra cash to close – Make up the gap between appraised value and contract price.
- Terminate contract – Cancel the sale if the appraisal is significantly lower than expected price.
- Appeal appraisal – Dispute the valuation if you believe there are factual errors.
Tip: Check your purchase contract – many include an appraisal contingency that allows the buyer to exit if the appraisal comes in low.
READ ALSO: How to Start Investing in Real Estate With Little to No Money
How Do Appraisals Impact Sellers?
As a seller, a low appraisal value for your home can jeopardize your ability to complete the sale at the agreed upon contract price.
If the buyer’s lender will only finance up to the appraised amount, the buyer may try to renegotiate for a lower sales price in line with the appraisal.
As the seller, you can:
- Lower your price – Accept a reduced price equal to the appraised value.
- Negotiate a middle ground – For example, split the difference between contract price and appraisal.
- Cover the gap in cash – Offer a credit to the buyer to cover the difference in value.
- Cancel the contract – Refuse to lower your price and void the sale agreement.
Tip: If nearby “distressed” sales brought down your home’s value, point this out. An appraiser may reconsider the comps used when a low appraisal seems inaccurate.
How Do I Prepare for the Appraisal?
Follow these tips to get your home ready before the appraiser visits:
For home sellers
- Make all needed repairs before listing your home for sale.
- Clean the home thoroughly and remove excess clutter.
- Mow the lawn, tidy landscaping, power wash exterior if needed.
- Ensure all appliances, plumbing, electric, HVAC are working properly.
- Highlight any recent renovations or upgrades.
For home buyers
- Inspect property carefully for issues early in buying process.
- Consider an pre-offer home inspection to identify problems needing repair.
- Research local market conditions and recent comparable sales.
- Negotiate repairs or credits for issues that may negatively impact appraisal.
For refinancing homeowners
- Compile list of improvements made since last appraisal.
- Clean and declutter to showcase home at its best.
- Address any deferred maintenance or needed repairs.
- Accurately report square footage and amenities.
Being proactive helps ensure you don’t lose money on a low appraisal down the road.
To Recap
Navigating the real estate appraisal process is essential for both home buyers and sellers. When you understand what an appraisal entails and how appraisers determine fair market value, you can better manage expectations before the appraiser sets foot on the property.
Being prepared with a clean, repaired home, pricing knowledge, and the right contingencies or flexibility can help minimize the impacts of an unexpectedly low appraisal. Work closely with real estate and lending professionals to track appraisal timelines and respond appropriately if valuations don’t align with expectations.
While an appraisal may sometimes deliver disappointing news, it exists to provide third-party validation that both buyers and sellers are engaged in an equitable real estate transaction based on actual data, not hopes or wishes. Taking the time to understand appraisals leads to smoother closings and better informed housing decisions.
Frequently Asked Questions About Home Appraisals
What are the types of appraisal reports?
There are a few common formats of appraisal reports:
- Uniform Residential Appraisal Report (URAR) – standard report for single family homes.
- Uniform Residential Appraisal Report Summary – condensed version of URAR.
- Manufactured Home Appraisal Report – for mobile/manufactured houses.
- Individual Condominium Unit Appraisal Report – for condos and co-ops.
- Small Residential Income Property Appraisal Report – for 1-4 unit rental properties.
Ask your lender which version you will receive. The URAR is most commonly used.
Should I be present for the home appraisal?
The buyers typically do not need to be present for an appraisal, though you can request to accompany the appraiser if desired. The process only takes about an hour for most homes, as they will inspect the home and grounds. Your real estate agent can help coordinate access for the appraiser.
How long are appraisals valid for?
A completed appraisal report is typically valid for between 90 to 120 days, depending on the lender. If the home sale does not close within that window, a new appraisal may be required before closing can occur. This is important to keep in mind when timing your transaction.
Should I get an appraisal before listing my home?
Sellers can choose to get a pre-listing appraisal, which lets you know the likely market value before setting your asking price. However, this isn’t required. Real estate agents will use comparable sales to help you appropriately price your home for today’s market. If needed, appraisal issues can be addressed after an offer comes in.
What are the qualifications to become an appraiser?
Appraisers must meet minimum education, experience, and exam requirements to become state licensed or certified. This involves completing courses in valuation methods, passing exams, and working under the supervision of an experienced appraiser for at least two years to start.
What should I do if I think my appraisal is wrong?
First, thoroughly review your appraisal report for any factual errors or inconsistencies. Raise any issues in writing to your mortgage lender and appraiser as soon as possible. Provide evidence to back up your concerns and request a revised appraisal valuation. If needed, you also have the option to hire another appraiser for a second opinion on the property value.
Does replacing a roof increase appraisal value?
Yes, replacing an aging or damaged roof with a new roof will typically result in an increased appraised value. Since the roof impacts the structural integrity of the home, a newly replaced roof signals to appraisers that the home has been updated and repaired. This can boost valuation. Keep any receipts or permits from the roof replacement project to share with your appraiser.
In another related article, Rent vs Buy: Real Estate
