House Appraisal: Everything You Need to Know
With a mind-blowing offer in hand, you’re holding your breath for what comes next: the home appraisal.
A house appraisal may not be top of mind when you’re looking to buy, sell, or refinance a home. But it determines how much a home is worth. The purpose is to protect the buyer and the lender from paying too much.
An appraisal isn’t the most glamorous part of buying or selling a home, but it’s a key step. Here’s more about the house appraisal process.
What Is a House Appraisal?
A home appraisal is an objective estimate of the value of your property. A licensed appraiser with no connection to the buyer, seller, or lender provides the home appraisal using the condition and location of your property, plus comparable analysis.
Home appraisals are not public records, but appraisers use public property records and other public documents to support their appraisals.
If you want to buy a home, you will need an appraisal. No credible financial institution will lend money for a house without one. In fact, most real estate transactions legally require them.
The appraisal helps the lender understand the home’s value in case the property must sell sooner rather than later.
The bank doesn’t want to be stuck with a home that can’t sell for what you owe on it. The homebuyer shouldn’t want that either, of course.
At the same time, appraisals can complicate real estate transactions. An appraisal could reveal that an agreed-upon sales price is not on target with a home’s value.
House Appraisal vs. Home Inspection: Knowing the Difference
A home appraisal is an expert’s opinion on the value of the property. Using their training, education, and experience, an appraiser determines if the home’s value is close to the agreed-upon sale price.
A home inspection identifies potential and existing issues with the property. Home inspectors survey properties looking for mold, plumbing issues, electrical problems, and issues with the foundation of the home.
1. Before selling your house
Homeowners considering putting their house on the market can have a pre-listing appraisal to get a better sense of the market value. Doing so can help determine a realistic asking price, increasing the likelihood of a fast sale.
2. Refinancing your home
When you refinance your home, you’re actually replacing your old mortgage with a new one because your home’s value may have changed. For that reason, lenders will require an appraisal to ensure the new mortgage amount can be justified by what the house is worth today. If the home’s value has increased since it was purchased, you may be able to get cash out as part of refinancing. However, if it has declined, you may have difficulty securing a new loan.
3. Getting a home equity loan
Unlike refinancing, home equity loans are a second loan on top of the existing mortgage. The amount you can borrow in a home equity loan is based on the amount of equity you have after the remaining value of the mortgage is subtracted from the current value of the house. If your home has decreased in value, you may not be eligible for a home equity loan.
4. Applying for other loans
Other types of loans, including cash and business loans, may require you to use your home as a source of collateral. The bank will want to make sure the money it lends is supported by the current value of your property.
5. Appealing tax assessments
In many states, property taxes are calculated based on the fair market value of your home. If the value of your home listed on your property tax bill appears too high—if housing prices in your neighborhood or city have declined, for example—you may be able to appeal the assessment.
An independent appraisal could help strengthen your case, which ultimately could lower your annual property tax. The process for challenging assessments varies by state and locality, so be sure to check whether your state or locality allows homeowners to submit their own appraisals when appealing property tax assessments.
Why avoiding a low home appraisal is important
A low home appraisal may mean that it takes longer to sell your house, which can be problematic if you have started the process of buying another home. If you have immediate changes such as planning to move for a job or a divorce, the low appraisal can make it harder to sell the house at the price you had hoped to obtain.
A low appraisal may also mean the house could be on the market for a longer period. Buyers are sometimes deterred by homes that have been on the market for many months, perceiving that there are problems with the house or asking price.
House appraisal cost
A house appraisal typically costs about $300 to $400 — with a national average of $336, according to HomeAdvisor. Fees vary by the type of loan. FHA appraisal fees vary by location and size of the home. The VA loan program has a set schedule for VA appraisal fees.
Although the lender orders the appraisal, the mortgage applicant typically pays for it as part of the mortgage’s closing costs.
What Does a House Appraiser Look For?
The purpose of a property appraisal is for the appraiser to see firsthand the home’s location, the quality and condition of its construction, the home’s amenities, and special features that may affect the property’s value. The appraiser compares these and other factors to those of similar homes that have recently sold in the neighborhood. It’s the comparison that ultimately determines the home’s value and marketability.
Almost every appraiser in the country uses Fannie Mae’s Uniform Residential Appraisal Report, a set of standards that determine the scope of an appraiser’s inspection. When using the URAR, the appraiser is obligated to inspect the home’s fixed qualities, such as its structure, age, and location. Specifically, with regard to the exterior of a property, an appraiser looks at the site, the quality of construction, the integrity of the roof and foundation, any issues with the guttering or siding, parking facilities, and the home’s observable external condition. The neighborhood also has an impact on the home’s value.
Inside the home, the appraiser is chiefly concerned with total square footage and functional layout – how well space is used. She checks the number of bedrooms and bathrooms, the size of key rooms such as the kitchen compared to the size of the other rooms in the house, the heating, electrical and plumbing systems, health and safety issues such as fire escapes and handrails, the number and quality of appliances, and the condition of the interior surfaces of the home. If the home has had a major remodel, the appraiser checks code compliance and the structural integrity of the walls and load-bearing beams.
It’s Not About the Décor
Appraisers are primarily concerned about the condition of the property, its layout, and its size. What they’re not evaluating, is the décor or furniture or whether the garden is a mess. In practical terms, appraisers are looking for any items that adversely affect the home’s value, such as needed repairs, soiled carpets, and plaster cracks. They also itemize the extra things that make the home desirable such as added insulation, air conditioning, or a new roof. If these upgrades are in good shape and the property is located in an area where people are willing to pay for them, they add value to the home.
The Sales Comparison
The most important tool an appraiser uses when valuing a home is “comparable sales.” This refers to the prices of homes of a similar age, size, and construction to the property being appraised that have recently sold in the same neighborhood. Suppose, for example, that three comparable properties sold last month for prices between $350,000 and $380,000. The appraiser starts with that range in mind and makes adjustments based on the features and characteristics of the property being appraised – adjusting upward if the home has a bigger lot size or better parking, or downward if the home has a smaller yard or needs maintenance. The final valuation is based on market trends, current sale prices, and the specific qualities of the home.
How Long Does A House Appraisal Take?
How long the in-person inspection part of a home appraisal will take largely depends on the size of the home. If you have a small home, the appraiser might be able to complete the process in less than a half-hour. For large homes, an appraiser may need a few hours.
How long the other parts of the process, including scheduling your appraisal and completing the final report, take depends on how busy your appraiser is. If you’re in the middle of the peak buying season, you can bet your appraisal company is fielding an abundance of requests from lenders on behalf of hopeful home buyers like yourself.
Once the in-person part is completed, the appraiser will gather data on comparables, which are recently sold homes that are similar to the home being appraised. Then, based on all the information they’ve gathered, they’ll create a report detailing the home and the appraiser’s opinion of the home’s market value.
This process may take a few days to a week, but it could be longer, especially if it’s the busy season in your area.
What Home Buyers Need To Know
If you’re buying a home with a mortgage loan, the appraisal is one of the most important steps toward a successful home closing.
The sale can proceed as planned if the appraisal comes in at or above the purchase price agreed to in the contract and if the appraisal comes in below that, the lender will adjust what it’s willing to give you. After all, the lender doesn’t want to lend more money than what the house is worth.
A low appraisal can put a snag in the home buying process, but it doesn’t have to derail it completely (more on that in a minute).
What Sellers Need To Know
When you’re selling your home, a low appraisal can mean you’ll have to accept less for your home than you originally anticipated.
When it comes to the appraisal, be prepared and proactive. Don’t expect the appraiser to know that you just installed a brand-new, top-of-the-line furnace.
Work with your agent to put together relevant documentation for the appraiser that could help you get a more accurate valuation.
What can you do to prepare for a home appraisal?
Getting an appraisal can be stressful, which is totally understandable. The value your home is appraised for will be a primary factor in how much money you can get for it.
A low appraisal tends to mean a lower selling price—not ideal when you want to make as much money as possible from your sale. Fortunately, there are things you can do to prepare for an appraisal.
1. Get it done early.
The information you will get from the appraisal is going to play a significant role in the planning process for the completion of your sale. If the appraiser finds a defect with your home, for instance, you can address the problem right away, so you are not scrambling at the last minute.
Of course, if you wait until the last minute to get the appraisal done, it is going to be much more difficult to fix problems before you try to close on the property. Do yourself a favor and get the appraisal done now so you can make informed decisions moving forward.
Ask your real estate agent to keep the mortgage approval date as tight as possible and to get the appraisal ordered.
2. Create a List Of Improvements
Before the appraiser arrives, make a list of every improvement you’ve made to the home. List out the work done and the date it was completed. If you can, include receipts and or any applicable permits.
Neighborhood comparables are a big consideration when appraising a home, but when you can show a long list of improvements, it’s likely to look favorable in the appraiser’s final numbers.
Keep in mind, though, that not every improvement is going to be worth something in the eyes of the appraiser, particularly if it only adds aesthetic value, or if it isn’t a permanent addition to the home. A fresh coat of paint isn’t in the same league as, say, a new heating and cooling system.
3. Explain The Comparables
The appraiser will be able to pull the basic information on the size and price of recently sold homes in your area. What they won’t do is actually enter each home to see the condition. Other than from photos they won’t know if the kitchen was in need of an upgrade or if the flooring was showing some wear and tear.
Before the appraiser arrives, make sure you’ve done your research on the properties that have sold in your area over the past 6 months. If a home sold for less than you’d like yours to appraise for, understand why.
Did it have structural issues or outdated bathrooms? This is the information you’ll want to share with your appraiser so they have a better understanding of why your home should be valued higher.
4. Clean your home.
A clean home is not going to prevent an appraiser from identifying major problems with your property. That being said, there is still something to the idea of dressing to impress.
When your home is clean and organized, it gives off the impression that you take care of the property. The appraiser maybe a little less prone to nit-picky observations and maybe a little more motivated to see the best in your home.
An appraiser is human just like the rest of us. The psychology of selling comes into play with a spotless, well cared for home. One of the ratings on an appraisal report is condition – keep this in mind.
Another advantage of cleaning your home thoroughly is that you will be able to see some potential problems that the appraiser would notice. If you find a damp area in the basement that has a bit of mold in it, you can get the problem fixed and the mold remediated before the appraiser has a chance to see it and write about the issue in his or her report.
5. Spruce Up The Exterior
The outside of your home is the first thing the appraiser is going to see when they arrive. For the most part, the appraisal will involve looking beyond any window dressing, but having a tidy and attractive exterior makes a good first impression and shows the appraiser that you take good care of your home.
If the weather is nice, make sure the grass is nicely mowed, and have a few well-placed flowerpots to add some color. You can also put down a fresh layer of mulch to spruce things up.
6. Give The Appraiser Space
Another great tip to prepare for an appraisal is to make it easy on the appraiser! Appraisers are people, and most people respond well to being treated with respect and courtesy.
They tend to have full schedules, so making it easy as possible for them to appraise your home is an easy way to get on their good side.
Keep in mind, being on the right side of a professional is not going to make him or her neglect job duties—if there are severe issues with the home being nice is not going to keep them off the report.
Making it easy to appraise your home means cleaning up, removing clutter, ensuring all areas are accessible like attics and basements, being on-time for the appraisal, etc.
7. Remember every $500 matter.
The $500 example is the idea that appraisers tend to measure the value of a home in increments of $500. If you have some minor repairs that need to be done and you leave them for the appraiser to find, he or she is likely to knock some value off of your home.
Things like broken doors, non-functional locks, faulty light switches, leaky faucets, are cheap enough to repair and will help you avoid lost value. Just think about how quickly each issue can add up when multiplied by $500, and you will find it easy to make repairs.
Again, this falls under the category of condition which an appraiser will be grading while visiting the property. Blatantly obvious repairs can affect the value of your home.
8. Make sure your real estate agent attends the appraisal.
The best real estate agents will attend the appraisal to help the appraiser. It is important for the agent to bring comparable sales data to support the sales price. The agent can also point out recent improvements, the quality of the neighborhood, and schools, etc.
An excellent real estate agents represents you at every phase of the sale. The appraiser will appreciate being helped as well. This is a vital step in getting ready for the appraisal.
9. Consider improving your landscaping.
While you should be careful about how you spend money on improvements before selling, some improvements are better than others.
Landscaping improvements can often be done for a reasonable price, especially if you do a lot of the work yourself. And those improvements may add noticeable value to your home.
You can plant flowers and replace dying areas of grass with more low-maintenance plants. Even planting and cleaning up can make your home much more appealing to anyone who drives by the door.
10. Definitely consult with a Real Estate agent.
If you are selling your house as a for sale by owner, consider getting some tips from a realtor. The problem with trying to do everything yourself is that you can miss important things.
Your local agent will be able to provide guidance specific to your home and your area that you cannot find anywhere else. The agent can also help you understand what improvements are likely to yield good returns. The better information you have, the better you can expect to do with the appraisal.
What Can Happen When You Are Not Prepared For an Appraiser?
The downside of not being prepared for an appraiser’s visit is that he or she could look at your property unfavorably. Why is this a problem? The appraiser is the judge, jury, and executioner when it comes to providing the lender with home value.
You may not like what the appraiser tells the bank about the value of your home. In other words, the house might not appraise for the value you expected – the agreed-upon sale price. This is the point in time where your stress levels will rise significantly.
You will now be either reducing the sale price of your home to what the appraiser says it’s worth or trying to fight it.
Let me be blunt – getting an appraiser to change the value of a home is not easy. Unless the appraiser made a factual mistake, you’re probably going to be out of luck.
It sounds like you should take the house appraisal process seriously right? Hopefully, knowing how to be ready for the appraisal has been helpful.