A home appraisal is a critical part of the home buying process. An appraisal determines the market value of a home, which impacts how much a buyer can borrow from their lender. While appraisals are a standard part of real estate transactions, the process remains a mystery to many homebuyers. This comprehensive guide will explain everything you need to know about home appraisals.
What is a Home Appraisal?
A home appraisal is an independent, professional valuation of a property. Lenders order appraisals on properties being purchased or refinanced to ensure the home is worth at least the amount being lent. During a purchase transaction, appraisals protect homebuyers by preventing them from overpaying. For lenders, appraisals reduce risk by confirming the collateral (the home) is valuable enough to secure the loan.
Appraisals estimate a property’s market value, or the likely sales price if the home is listed. This differs from assessed value for tax purposes or automated estimates like Zillow’s Zestimates. A licensed appraiser personally inspects the home and generates the appraisal report.
Why are Appraisals Required?
Most mortgage lenders require appraisals because they provide third-party validation of a home’s value. The appraised value determines the amount a lender is willing to loan. For example:
- Susan offers $350,000 for a home.
- The lender orders an appraisal, which comes back at $330,000.
- Susan’s loan amount would be based on the appraised value of $330,000, not her offer.
Without an appraisal, lenders risk lending more than a property is worth. Appraisals protect lenders from inflated home prices and provide assurance when underwriting loans.
How Does a Home Appraisal Work?
Home appraisals follow a standard process, though exact details can vary. Here are the typical steps:
1. Order Appraisal
After a homebuyer’s offer is accepted, the mortgage lender orders an appraisal. A local appraiser is randomly assigned the job through an appraisal management company (AMC). Refinance appraisals are also ordered at this stage.
2. Appraiser Inspects Home
The appraiser will contact the homeowners to schedule an inspection. The inspection may be in-person or virtual. The appraiser evaluates the home’s exterior and interior condition while taking photos. For a regular appraisal, the interior inspection takes 30 minutes to an hour.
3. Compare Recent Sales
The appraiser researches recent sales of comparable homes nearby. Information is gathered from public records, Multiple Listing Services (MLS), and appraisal data services. The appraiser analyzes sales trends in the neighborhood.
4. Generate Appraisal Report
The appraiser summarizes their analysis, photos, and comparable sales data in a standard appraisal report. Common formats include the Uniform Residential Appraisal Report (URAR) or Condominium/Planned Unit Development (PUD) reports.
5. Review Appraisal
The lender reviews the appraisal report for any abnormalities. The homebuyer also receives a copy to review before closing. Any concerns should be raised immediately with the lender.
What Do Appraisers Look For?
Appraisers evaluate many factors about the property and surrounding neighborhood. Key elements include:
- Location: Where the home is situated (rural, urban, suburb) and amenities nearby (schools, parks, etc.)
- Lot size: Total land area and dimensions of the property.
- Home size: Interior square footage, number of bedrooms/bathrooms, layout.
- Age and condition: Materials used, renovations done, signs of damage or wear.
- Amenities: Garage, deck, pool, fireplace, and other upgrades.
- Neighborhood trends: Median sales prices, market demand factors, foreclosures.
- Improvements: Remodels, repairs, and updates that add value.
- Construction costs: The cost of rebuilding the home from scratch.
Appraisers rely heavily on comparable sales to estimate value. The appraiser selects 3-5 similar homes that sold recently and compares them to the subject property. Adjustments are made for differences in size, condition, amenities, etc.
What Happens if Appraisal is Low?
A low appraisal can threaten a home purchase. Buyers have three options if the appraised value comes in under their contract price:
- Renegotiate the Price: The buyer can request that the seller lower the price to the appraisal amount.
- Bring Extra Funds to Close: The buyer covers the gap between contract price and appraisal with a larger down payment.
- Exercise Appraisal Contingency: The buyer can cancel the contract without penalty if the purchase agreement contains an appraisal contingency.
Low appraisals are frustrating, but not the end of the world. Having an appraisal contingency in the purchase agreement provides the buyer with an “out” if the appraised value is unexpectedly low.
While appraisal results are out of your control, homeowners can take steps to maximize their home’s value:
Clean and Declutter: Make the home welcoming by tidying up each room. Put away clutter and personal items.
Do Minor Repairs: Fix leaky faucets, chipped paint, squeaky doors, burned out light bulbs, etc.
Mow and Landscape: Keep lawns freshly cut, leaves raked, and plants trimmed back.
Gather Project Details: Compile documents showing home improvements, renovations, and repairs done.
Offer Comps: Provide recent comparable sales supporting your estimated home value.
Preparing for an appraisal signals to the appraiser that you care about the home. It also ensures the appraiser can inspect the property easily and focus on valuation.
Other Home Valuation Methods
In addition to appraisals, homeowners can get estimates of their property value in other ways:
- Comparative Market Analysis (CMA): Real estate agents put together a CMA by comparing your home to recent sales in the neighborhood. CMAs give a ballpark figure early in the home selling process.
- Automated Valuation Model (AVM): Services like Zillow use algorithms to calculate home values based on public data. AVMs offer instant estimates but lack human insight.
- Assessed Value: Your local tax assessor determines a property’s value for tax purposes, but this often differs from true market value.
- Professional Inspection: A home inspector looks for physical defects but does not provide a dollar valuation. Inspections focus on condition and safety.
Appraisals remain the gold standard for establishing a home’s market value because they combine location analytics, property inspection, and local expertise.
Home Appraisals vs. Home Inspections
Home appraisals and inspections are easily confused but serve different purposes:
- Appraisal: Estimates the property’s market value for the lender. Required for mortgages and refinancing.
- Inspection: Evaluates the physical condition and safety of the home. Recommended for homebuyers’ knowledge.
While appraisers and inspectors both visit the property, the appraiser focuses solely on valuation while the inspector looks for issues like roof damage or faulty electrical. Inspections are for the homebuyer’s benefit, while appraisals are for the lender.
Frequently Asked Questions About Home Appraisals
Many homebuyers have questions about the appraisal process. Here are answers to some commonly asked questions:
How much does an appraisal cost?
Appraisal fees typically range from $300-$600 depending on the region, size of home, and scope of work required. Lenders cover the cost of appraisals for purchase loans and refinances.
How long does it take to get an appraisal?
A standard appraisal takes 1-2 weeks from order to completion. Rushed appraisals can sometimes be done in 3-5 days for an additional fee. Delays occasionally happen during busy times.
Can I choose the appraiser?
Lenders assign appraisers randomly through an appraisal management company (AMC). Homeowners cannot select the appraiser, though lenders will avoid sending someone you’ve used recently.
Does an appraiser look at everything?
The appraiser will inspect the home’s interior and exterior. They note details like room sizes, condition, amenities, upgrades, and visible defects. The inspection is not exhaustive like a home inspection would be.
How accurate are home appraisals?
Appraisals provide educated estimates of value, not an exact sale price. Appraised values typically fall within 10% of the final sale price. Significant differences warrant a review of the appraisal report.
What if I disagree with the appraisal?
Homeowners have a right to review the appraisal report before closing. If you see factual errors or questionable comparable sales, discuss them immediately with your lender and request a second appraisal if needed.
In another related article, A Step-by-Step Guide to Real Estate Market Analysis for Investors