The Home Appraisal process is something both home buyers and home sellers need to understand. In the Steps to Selling a House, the appraisal will determine how much your home will ultimately sell for. Conversely, in the Steps to Buying a House, the appraisal acts as an additional assurance to home buyers that they are not overpaying for a property.
What is an Appraisal?
By definition, an appraisal is an expert assessment of the value of something. For our purposes, we are talking about the value of a home.
The appraisal comes in the form of a report that is researched and compiled by a licensed appraiser. The expert part of our definition refers to a licensed appraiser. A residential appraisal can only be performed by a licensed appraiser. Any other type of valuation from someone like a REALTOR® or something like a website is merely a price opinion.
An appraisal report is used to help someone make a decision. When there is a loan involved in a real estate transaction, the lender will most likely require an appraisal. The purpose of this type of appraisal is to assure the lender the value of the home is not less than they are lending.
Other uses for an appraisal
There is a wide range of uses for Appraisals in addition to home mortgages.
- Refinancing a mortgage
- Estate planning
- Estate settlement
- Tax assessment review
- Tax advice
- Dispute resolution
How much does an appraisal cost?
In general, a residential appraisal should cost somewhere between $250 and $500. Since no house is exactly the same, the pricing of an appraisal isn’t either. There are a number of factors that go into the cost of an appraisal. Let’s take a look at the different factors that influence the cost.
Square Footage – Larger houses generally take more work to inspect for the appraisal. The appraiser must measure the property which takes longer. Additionally, larger homes have more improvements to note as well.
Location – Remote or rural properties are usually more difficult to find comparables sales for. The research time involved in tracking down sales data drives up the cost of the appraisal as well.
Complexity – Unique or special properties present distinct challenges for the appraiser as well. Waterfront homes, horse properties, historic homes, etc… have rare improvements and are difficult to find comparable sales for.
Who pays for the appraisal?
The lender orders the appraisal but it’s the buyer that pays. The appraiser gets paid at the time of the appraisal and since the appraisal is a contingency, it is part of the buyer’s due diligence. The buyer can certainly ask the seller to pay for the appraisal but sellers are generally reluctant to cover this cost. In the event, the property doesn’t appraise or if the deal doesn’t close, the seller might have a difficult time getting their money back. One option is to have the seller cover this cost as a reimbursement at closing.
How does an appraisal work?
The entire appraisal process starts with a contract. The home buyer should have been pre-qualified for a mortgage by a lender and ultimately pre-approved by the lender they choose to work with.
Once the buyer has an offer accepted on a house, they are what we call “under contract”. At this point, the due diligence phase begins. There are various contingencies in the contract that allow for the buyer to do inspections and arrange for financing.
The lender should receive a copy of this contract. This receipt is the lender’s cue to order the appraisal. The appraiser will schedule a time to visit the home to do the appraisal inspection. This is when the appraiser will gather the data they need in order to compile the appraisal report.
What is a home appraiser looking for?
The appraiser visits the home to verify what is there, they will be measuring the home and creating a floorplan. They need to verify the gross living square footage as well as the number of bedrooms, bathrooms, etc… Additionally, they will be looking for any upgrades or updating you’ve done to the home. For example, have you replaced windows or flooring, have you done any renovations?
What they are trying to establish is how your home compares to the comparable sales they will be using in their report. If your home has an unfinished basement but one of the comparable properties has a finished basement, the finished basement will receive a credit. On the other hand, if you have replaced flooring and windows and the comparable has not, you will receive credit for these updates.
The appraiser assigns these debits and credits back and forth between the comparables and your home (the subject) until they arrive at a final value.
How to prepare for a home appraisal
Since the appraisal is so important to the success of a home sale, sellers generally want to know what they can do to prepare for the appraisal. While we don’t suggest any major projects before the appraisal, we do have a few common sense suggestions.
Clean like you would for a showing. An appraiser will tell you the cleanliness of a home does not impact the value. Having said that, appraisers are only human.
Make any repairs to maintenance related items, this includes things like leaking faucets, broken or missing electrical or light switch plates, damaged or broken windows, etc… Ignoring these types of minor repairs doesn’t necessarily count against the value of the home but it gives the overall impression that the home has not been maintained.
It’s also important to address any health and safety concerns. This means CO detectors, smoke detectors, etc…If the appraisal is for an FHA loan you will need to make repairs that relate to health and safety related issues. Any of these types of repairs will be called out in the appraisal inspection and the appraisal will be “subject to” those repairs being completed. The appraiser will need to come back out to the property to reinspect, this will take more time and cost more money.
List of any repairs, updates or renovations. The appraiser is trying to build a case to support the value of your property. You can help them by letting them know about any repairs or renovations you have done over the previous 15 years. The types of items that the appraiser is interested in are:
- New Roof
- New Windows
- Upgraded HVAC
- Finished Basement
- Kitchen Remodel
- Bath Remodel
These types of repairs and renovations impact what is known as the “effective age” of your home. For example, a 20-year-old home with significant upgrades and renovations could effectively appear to be a 10-year-old property. This adds value to your home.
So, put together a list of any improvements or repairs, the appraiser will appreciate it and it can only help your case.
Ensure access to the entire house. The primary work of the appraiser on the inspection visit to your house is measuring. It’s essential that you provide access to the entire property so that the appraiser can establish the actual square footage of the home.
This includes basements, attics and yes, closets. Homeowners often ask “Do appraisers look in closets”? The answer is yes, the appraiser may need to measure inside of closets to establish square footage or see what impact the closet has on another room.
Share a copy of a Plat map or Survey, Your lot is an important part of the equation. If you have a copy of a survey or plat map give this to the appraiser as well. It’s important they know the corners and boundaries of your lot. This is especially important if you have an irregular shaped lot or if added to your lot size by purchasing adjacent parcels.
Information on Private Sales. The appraiser will use data for comparable sales from the MLS and County Records. Private Sales are transactions that occur directly from the seller to the buyer with no broker involved, these sales don’t appear in the MLS. This type of sale will eventually appear in County Tax Records but this can take weeks and sometimes months. If your appraisal happens before the transaction gets recorded, the appraiser might miss out on a valuable comparable sale. You should make the appraiser aware of any of these types of sales you are aware of, especially if they are similar to your home.
Appraisal came in Lower than purchase price
The big fear, especially for home sellers during a real estate transaction, is that the appraisal will come in below sales price. If this does happen, there are a couple of steps you can take.
Look for errors – Appraisers are human and can make mistakes, so the first step you should take is to comb through the appraisal report and look for any errors or discrepancies. Here’s a great place to start.
Check the Comparable Sales – Make sure the comparable sales make sense. If there was a private or recent sale that could help your case, let the appraiser know about it. The appraiser will primarily use the MLS and the County Records to find sales data, sometimes these sources aren’t up to date. If the information isn’t there, the appraiser would have no idea about these types of recent or private sales.
Request a Different Appraiser – This option should only be used if you feel like the appraisal is wrong and the first appraiser will not change their opinion. You don’t want to roll the dice with another appraiser, only to end up at the same value the first appraiser came up with.
Renegotiate the Contract – The appraisal is the reason expert pricing is so important at the beginning of a real estate transaction. By the time we get to the appraisal, expectations have been set and plans have been made. This is not the time to find out the price your Real Estate Agent recommended was based on “winning” the listing, not market knowledge and research.
If you do find yourself in this position and you have exhausted all other options, it might be time to renegotiate the contract, especially if you really want to sell your home.
Mortgage Lenders will not loan more than an appraised value, so the appraisal value really is the true sales price, unless you can find an all cash buyer that doesn’t doesn’t mind overpaying.
The buyer is most likely motivated to stay in the deal as well. Remember, they have already applied for a mortgage loan, paid the appraisal fee and most likely done their inspections.
In cases like this, it’s generally better to work with the buyer that’s already invested in the transaction as opposed to starting all over again. Even if it means reducing the sale price, it probably makes sense.
The best time to think about the appraisal is before you choose a listing price for your home. If your home is priced right and well maintained from the beginning, the appraisal should be a breeze.
Additional Resources:
How to Prepare For a Real Estate Appraisal by Bill Gassett
The Home Appraisal – The Second Sale by Karen Highland
How To Prepare For An Appraisal When Selling Your Home by Kyle Hiscock