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After finding the home of your dreams, you know you’ll have to jump through some hoops before you’re a homeowner. One of those hoops is the appraisal, which can cause anxiety for both the seller and the buyer.
The seller is hoping the appraisal is comparable to the agreed-upon sale price (If it is much higher, then this would mean they may have lost out on money; If it is too low, there is a possibility they might have to lower the price to keep the buyer). The buyer is hoping for an appraisal greater than or equal to sale price (If it appraises higher, then they’re getting an excellent deal, but if it appraises too low, they may not get approved for their loan).
What happens during a home appraisal, and what do you need to know? Who is this person deciding how much a home is worth, and what is the fallout if their assessment is different than what was expected? Read on to understand the process in detail!
What is an appraisal?
The buyer and seller have entered into a contract, earnest money has been put down, the home has passed inspection (another point of anxiety!) and now it is time for the appraisal. A licensed expert (an appraiser) will determine how much the house you want to buy is worth in the current market.
Appraisals are often required for the buyer to secure a loan. This is because the lender wants to know that the loan collateral (the house) is worth at least the amount they are lending you. For cash buyers, however, the appraisal is optional (and how the information from the appraisal is used depends on the contract).
When the appraisal is complete, the appraiser delivers the findings in a detailed report that shows how the value of the home was calculated and the role played by each of the factors considered.
What happens during an appraisal?
Appraisers typically begin by looking at the purchase agreement. Ideally, however, knowledge of the purchase price should not play a role in the appraised value. Instead, the main focus should be on the other details in the purchase agreement, such as listed repairs or other factors that went into determining the purchase price.
The appraiser will then take steps to evaluate the market, research the house and its tax history, and then visit the home for an inspection. This inspection is not done to the same depth as the official home inspection you will likely already have had at this point, however. The purpose of the appraisal inspection is to determine how many bedrooms and bathrooms the house has, as well as the condition and any updates that would go into determining the home’s value.
If the appraiser is contracted by an FHA or VA lender, they may also be looking for safety hazards. Omaha-area real estate agent Rusty Johnson says that while they don’t catch everything a home inspector would, “If an appraiser says ‘sorry, it’s not safe,’ then that could kill the deal.”
The appraiser then takes all observed and researched factors into consideration and generates and submits their report.
How appraisers evaluate the market
The appraiser will look for recently sold comparable homes (“comps”) near the one you want to buy. Comparable homes ideally are not only close in proximity to the home being appraised, but are also approximately the same size, have the same number of bedrooms and bathrooms, were built and/or updated around the same time, and are in the same school district.
This process can be complicated, however, if the home you want to buy is irregular in some way. Johnson adds that, “If you get into older neighborhoods where you’ve got more of an eclectic blend, you do start to see a mix and match of homes,” and appraisers may have to get a little more creative.
The appraiser will also look at neighborhood attributes, such as whether it’s an urban, suburban, or rural area, how developed it is, one-unit housing trends, neighborhood boundaries, and so on. Current trends in the market may also play a role, especially if prices have been changing rapidly.
Researching the house
The appraisers will also look at public records associated with the property. For example, they will look at the property’s tax history, which can give some indication of how the property’s value has changed over time. Note, however, that assessing a home’s value for taxation purposes is very different from appraising a home for sale. The appraised value is an indication of how much the property is worth based on the current market. The assessed value for tax purposes is calculated by very different means and for different purposes.
The appraiser may also look at surveys to determine whether the property is in a FEMA flood zone. Flood zones are rated based on severity. The lender wants this information because they don’t want to give you a loan on a house that’s going to be washed away in a few years.
This doesn’t mean you can’t get a loan on a house in a flood zone, however. It just means that they will probably require that you purchase supplemental flood insurance.
How an appraiser inspects the home
After background research is complete, the appraiser will arrange a time with the seller to visit the home, make measurements, and take pictures.
The things they will look at include the number of rooms, size of rooms, size of house, and size of the lot. Larger rooms and larger lots typically increase the appraised value.
Other features under consideration include whether the home has a view, is near the waterfront, or possesses another attribute that would make it more desirable and add value. On the flip side, if it’s near a busy highway, train tracks, a power plant, or a garbage dump, these features will often detract from the value.
The condition of the house is also evaluated, both inside and outside. Is the house in livable condition? Is it up to the standards of other houses in the neighborhood? Peeling paint, cracks in walls or ceilings, and other damage will all bring down the appraisal value, while improvements — such as a new roof, remodeled kitchen, energy-efficient windows, updated HVAC, electrical, and plumbing — will all add value.
Appraisers will look high and low, assessing the condition of the foundation, determining whether there is a basement or crawlspace. Is the basement finished? Does it have an exit? Are there any signs of dampness or pests? They might then move on to the attic if one exists, and look for the same things, particularly any indication of moisture or pests.
The method by which the home is heated and cooled is also a factor. A home without central air conditioning will often appraise lower than a home with a fully integrated heating and cooling system. The materials used to build the home also add or subtract value, including the floors, walls, trim, countertops, and so on.
Additional amenities are another place where value can be added. Appraisers will look for a pool, fireplace, patio, wood stove, fence, water features, and other similar items. They also consider exterior features, such as decks, porches, whether or not the driveway is paved, how much parking is available, and any outbuildings, such as sheds or garages.
Computing the final value
The appraiser will calculate a value using one of several methods.
Comps (comparable houses in the area) often play a big role. Once the appraiser knows the finer details of all the home’s features, they can make a more accurate comparison to nearby homes that may have sold recently, adjusting for differences between the properties.
Another method that may be incorporated is the cost approach, which involves determining how much it would cost to replace the house and all associated features. Using all of their accumulated information, they may also look for comparable units that are for rent and make a determination based on monthly market rent.
What happens after the appraiser submits their report?
Once the report is submitted, the buyer, seller, and lender will all be able to see the appraised value. The next step is determining what to do with that information.
The lender will not want to lend any more than the appraised value. Otherwise, they are taking a risk if the buyer defaults on the loan because the house won’t offer enough collateral to support the balance left on the loan. If an appraisal comes in considerably lower than the agreed-upon price, the buyer will either have to convince the seller to lower the price, or will need to use other funds to cover the gap between sales price and loan amount. A recent study by the Consumer Finance Institute found that fewer than 10% of appraisals were below the home price.
Johnson says to keep in mind that an appraisal is, “One person’s opinion on that specific day, and sometimes they do or do not take into account market demand.”
Indeed, if multiple buyers are willing to pay more than the appraised amount, it may be fair to take a low appraisal number with a grain of salt. In a buyer’s market, however, the seller may have to be willing to come down on price — though it’s worth noting that the seller is not required to alter the price based on the appraisal if they don’t want to. But by that same token, you’re not obligated to pay the full sales price if the house appraises for lower.
If you’re not sure what happens during a home appraisal, talk to your real estate agent, who should be able to guide you through what it means for your purchase. If you are looking to buy a home and need a real estate agent in your area check out HomeLight’s agent finder to find the right match today.
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