You might have heard that the home appraisal process is nerve-racking for sellers, eager to see what financial value a professional appraiser places on their home. But buyers don’t find this smooth sailing, either. With about 40% of Americans in one survey saying that buying a home is the most stressful event in modern life — and 13% of those respondents worrying after purchase that they overpaid — the more informed a buyer is, the better.
When associated with a mortgage, an appraisal is a risk-prevention step for the lender that ensures the house is worth more than the amount of money that the buyer wants to borrow for the purchase. Although the buyer pays for the appraisal (on average, about $335 nationwide), the lender is essentially the appraiser’s client and often specifies an “acceptable appraisal” as a contract contingency.
“Most purchase offers are contingent on a property appraising for at least the contract price,” says Mike Ford, a general certified real estate appraiser serving greater metropolitan Los Angeles and a member of the American Guild of Appraisers. “From that perspective, it is to the borrower’s advantage to know that they are not overpaying for a property.”
Let’s walk through some home appraisal tips so you can better understand this important step in the purchase process and boost your buying confidence.
The value of an appraisal
An appraisal provides reassurance of a property’s value. Some sellers have their homes appraised before listing them on the market to help arrive at a fair asking price.
For buyers, an appraisal is a requirement for most mortgages, both government-backed and conventional. Statistics from the National Association of Realtors (NAR) show that of all the sales that closed in November 2019, 73% had contract contingencies, such as obtaining an acceptable appraisal (43%), financing (43%), or a home inspection (53%).
A lender not only uses the appraisal as a quality check but also to arrive at a loan-to-value (LTV) ratio — basically, how risky the loan is for the lender. This ratio is calculated by dividing the amount borrowed by a property’s appraised value, then expressing the result as a percentage.
For example, if a property appraises at $200,000, and the buyer has $40,000 to put down on the home, then the buyer will need to borrow $160,000 from the lender: $160,000/$200,000 = 0.80, or an 80% loan-to-value ratio. If your LTV ratio is at or below 80%, you pay a lower interest rate, plus you won’t have to pay private mortgage insurance (PMI), reducing your monthly mortgage payments.
A property’s appraised value also indicates how much you’ll pay in real estate taxes — and gives you an idea of how improvements you make can add to your home’s equity.
Objective and impartial
The Uniform Standards of Professional Appraisal Practice — or quality control standards — require an appraiser to be impartial and “not favor a predetermined outcome,” according to the Appraisal Foundation, the nation’s Congressionally authorized source of appraisal standards and qualifications. A lender doesn’t typically contact an appraiser directly but uses a third-party appraisal management company to find and hire an appraiser in the buyer’s area.
Appraisers must never take an assignment contingent upon “hitting a number,” the Appraisal Foundation says, and they cannot accept assignments where they can’t be independent and objective.
That said, appraisers rarely fail to confirm the contract price. Researchers at the Federal Reserve Bank of Philadelphia found that roughly 30% of appraisals precisely equalled the contract price, a finding consistent with other studies. Another study of two decades’ worth of appraisals submitted to the Federal National Mortgage Association, commonly known as Fannie Mae, found more than 90% valued homes at or above the purchase price. In nearly one-third of purchases over the same time period, this study shows, appraisals valued properties at exactly the sales price.
The researchers suggested improving the appraisal process to give borrowers more opportunity to renegotiate a sale price.
There is some negotiation around this process already, however. NAR statistics show that of the 23% of contracts that were delayed but eventually closed in November 2019, 18% had appraisal issues.
How to handle the home appraisal process
You can’t (and shouldn’t!) do anything to influence the appraiser, but you can prepare yourself for what’s to come.
1. Know what features impact home value
An appraiser looks at the age of the home, the square footage, the layout, the location, utilities, and various upgrades or renovations. An appraisal also includes an assessment of the home’s condition, such as whether any components are new or show deferred maintenance, deterioration, depreciation, or wear and tear.
How close is the property to a metropolitan area? To schools? How does its size compare to other properties in the area? In general, a bigger footprint means more value, but if it’s an older home, higher maintenance and energy costs could offset the value of more space.
An appraisal is not equivalent to or a substitute for a home inspection, which is a nuts-and-bolts analysis of a home’s construction and its systems. However, some lenders appraising homes for VA loans or FHA loans will require an appraiser to note particular items on a property, such as chipped or peeling paint, or a lack of handrails on stairways.
Ford says appraisers also notice obvious safety violations, such as a lack of smoke detectors. In addition, they take into account any conditions that could affect an owner’s ability to use the property the way they want, such as substandard construction or the home’s location within a flood zone.
A listing agent should ensure that the sellers grant the appraiser access to all areas of the home, similar to when a home inspector visits the property.
“‘Buyer to verify all permits’ is a red flag,” he adds. If an appraiser suspects something like a finished basement or converted garage wasn’t built properly as living or rentable space, they’ll ask to see permits.
2. Understand the value of other homes in your area
One way that appraisers calculate a home’s value is to compare it to properties that have sold recently that have similar characteristics, such as age, square footage, and proximity. The listing agent also can provide comparable properties, or comps, to show how the sellers arrived at an asking price.
On the Mark Appraisals website, a company serving the Atlanta, Georgia, area, the company recommends that sellers provide the most recent tax bill or legal description of the property, any items to be sold with the home (such as appliances), home inspection reports, and a “brag sheet” of the cost, date, and permitting for major home improvements. This helps appraisers find the most accurate comps for the home.
Buyers’ agents also often find comps to explain their perceived value, said Jeremy Zucker, a real estate agent for 14 years serving the White Plains and New Rochelle areas in New York. “I’m always prepared to show them why we’re paying more for the house or less for the house, or just generally why my people identified this as something they want to live it for the next number of years,” he said.
Comps might not always provide a clear picture of a home’s value, however. In areas where homes don’t sell very quickly or there aren’t very many homes for sale — such as rural markets — finding recently sold comparable properties could be a hefty challenge. And homes with unique features, such as a sweeping view or a waterfront location in a landlocked state, can also present challenges when an appraiser tries to find appropriate comps.
3. Wait patiently
Five to ten working days is a good time frame for an appraiser to turn around an appraisal report, Ford said. Uncooperative parties, a lack of permits, defective or dangerous conditions, and other issues “can all add to the time it takes to do the job right.”
The size of the property and the availability of appraisers in your area also can impact the turnaround time and the cost, according to personal finance website Bankrate.com.
4. Discuss your options
If the appraisal comes in at or around the purchase price — or higher than that — you’re in good shape.
If the appraisal comes in below contract price, buyers have three choices: renegotiate with the seller, make up the difference in price, or walk away.
James Krueger, who ranks in the top 1% of seller’s agents in Houston, once sold a house that went through three potential buyers. The first two backed out after the appraisal came in below contract. The third ended up purchasing the home, but met in the middle with the seller on the asking price and the appraised value.
A buyer can choose to pay more than what the appraisal says a property is worth, but “they are doing so with full knowledge that the market data does not support the contract price, and they are ‘upside down’ from day one,” Ford said. (This means that the buyer might owe more money for the house than it’s actually worth.)
In a competitive situation with multiple buyers and bids, Zucker said his buyers have said they’re willing to cover the first $10,000 or 1% to 2% of an appraisal shortfall.
“We talk about what we’re willing to cover because otherwise, the deal could fall apart.”.
In those cases, the buyers are already thinking of repainting and so on to make the house their own, so “the extra 1% or 2% usually does not make a difference,” he says. “Part of the conversation is also, ‘This is not a 3-year plan. You’re buying this house, and I want you to be there for 10 or more years.’”
5. Consider an appraisal reevaluation or an independent appraisal
Negotiations aside, if the appraisal price seems much lower than the contract price, your agent (or the listing agent) can ask the appraiser to reevaluate their report. Sometimes appraisers can make mistakes in the basic data (such as the number of bedrooms or baths), or they need context for the comps, such as if a recent sale for a lower-than-typical price was between family members — or if a more-recent sale is available that changes the perspective.
You also can pay for an independent appraisal. All states require appraisers to be state-certified or licensed, but as in any profession, some appraisers are more qualified than others.
Ford suggests that buyers ask how much of their appraisal fee went toward the appraisal itself as opposed to an appraisal management company or appraisal services firm, where about 41% of appraisers in 2019 worked, according to the Appraisal Institute.
“If you paid $1,000 and the appraisal firm kept $500 or $600, then chances are, your appraiser may not be the most qualified,” he says.
As noted, the average cost of an appraisal nationwide is about $335, but that cost can vary depending on the complexity of the property and the area where you live, according to HomeAdvisor.com. An appraisal in a metropolitan area can start at $600.
While it might not be economical, a separate appraisal could be worth the peace of mind, depending on the property and the situation.
“My experience suggests it’s the higher-end buyers that are most likely to be more significantly hustled rather than in the bread-and-butter property ranges. There is simply more at stake and more greed inducement,” Ford says.
Talk with your real estate agent about their experience with the appraisal process, how they’d recommend handling any shortfall — and how willing you should be to walk away from a deal that’s not right for you. The elation over your purchase won’t last if concerns about whether you overpaid give you buyer’s remorse.
As Ford notes, “Don’t become so invested in the property that you are willing to automatically keep the deal going, even if the value is significantly out of the supported range.”
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