It’s natural to feel uneasy when the home appraiser shows up at your house. After all, there is a lot riding on your home’s appraised value. If your appraisal comes out lower than you planned, it could end up delaying or disrupting your home’s sale. Fortunately, by understanding the home appraisal process and taking a few steps to shore up your home’s value, you can cut down the chance you’ll run into appraisal problems.
In this article, we walk you through the role and objective of the appraisal, ways your appraiser calculates your home’s value and explain what you can do to help make sure the appraisal doesn’t derail the transaction.
The home appraisal process basics
Unless you sell your home for cash or get an appraisal waiver, your home sale will probably include a home appraisal. During this process, a third-party appraiser will assess the property that you’re selling and will determine the fair market value of your house. That final price will show the buyer’s lender how much money they should be loaning to the buyer. Here are a few answers to the essential questions sellers have about the home appraisal process:
What’s the purpose of a home appraisal?
The purpose of home appraisals is to protect the financial lender and buyer. It’s built in as a safety net to make sure that the price of the home is a fair reflection of the actual value of the home. That means, if you want to sell your home on schedule, you will need the home appraisal to be at, near, or above your final agreed-up price — which means setting the price correctly in the first place.
When does the home appraisal take place?
The appraisal happens after the seller and buyer both sign the purchase agreement. That means that the seller has listed the house, the buyer has made an offer on it, and the seller either accepted the offer or finalized negotiations with the buyer.
Who is the appraiser?
Your appraiser will be a third-party professional who is usually picked out by a lender. In addition to completing appraisal education courses, appraisers can hold several different types of licenses. Here are a few common certification levels for appraisers:
- Licensed Residential Appraiser
- Certified General Appraiser
- Certified Residential Appraiser
In most cases, an appraiser also needs to work for at least 1,000 hours under a mentor’s guidance before they can qualify for their Residential Appraiser license. Their goal is to provide an objective assessment of a home’s value.
Who pays for the appraisal?
It’s usually up to the buyer to arrange and pay for an appraisal. Most home loan lenders will require an appraisal before they’ll finance a home. A typical home appraisal usually costs around $400-$600. Also, government-backed loans, such as VA and FHA loans, will often require an approved FHA or VA appraiser to examine the home.
What happens if your home appraisal price is too low?
If the appraised value ends up landing at or close to the price the buyer and seller agreed upon, the sale has the go-ahead to carry on as planned. However, if the appraised value is lower than that price, it can delay the sale.
In fact, according to the National Association of Realtors® (NAR), 25% of home sales are delayed and 13% of contracts are canceled because of appraisal problems. That’s because a lower appraisal may mean the bank will be putting up less money than the buyer expected for the sale. So, the buyer will either need to make up the difference or try to renegotiate the sale.
Either way, unexpectedly low appraisals can delay a sale or cause a buyer to walk away, and buyers will often include an appraisal contingency in their offer, giving them the right to renegotiate or walk away from the deal because of a low appraisal value.
Common types of appraisals
Not all appraisals come in the same form. Here are a few different types of appraisals:
Traditional in-person appraisals
When an appraiser conducts a traditional in-person appraisal, they’ll examine the home and look for major items that will affect the home’s value. For instance, they may count rooms, check whether the HVAC system works, and look for upgrades or additions that improve the home’s price. They’ll combine that in-person information with broader research about neighborhood home sales, the house’s location, and other factors that could impact the home’s final fair market value.
With a hybrid appraisal, the appraiser may not physically visit the house to assess its value. They’ll still gather information about the house’s features, market, and other factors. But instead of stepping onto the property, they might assess the house by looking at photographs. They also might hire a real estate agent, home inspector, or another third-party person to gather information about the house for them.
Remote, or desktop appraisals, leapt during the pandemic. In this type of appraisal, a professional will conduct the full assessment without physically visiting the house or relying on a third-party. In this scenario, nobody sets foot on the property, and the full appraisal is done remotely.
In addition to being a popular way to maintain distance during the pandemic, this type of appraisal has also gained traction lately as a potential way to fight racial bias. Because it acts essentially as a blind appraisal, where the assessor interacts with important data rather than homeowners, desktop appraisals could reduce racial bias that otherwise may cause inaccurate or unfair appraisal values.
What the home appraisal process looks like for sellers
Whether you’re selling your house or trying to refinance your home, it’s important that your home appraisal doesn’t dip below your expectations. But if you understand how home appraisals work, it will be easier to prepare before the appraiser pops in. Here are some important details about the home appraisal process:
What is an appraiser looking for?
As an appraiser assesses the value of your home, they look for a few common things that could impact the home’s value. Here are some of the typical things appraisers look for:
- Your home’s structure, including the interior, exterior, roof, and foundation
- Your home’s neighborhood, location, and local market
- Improvements and additions you’ve made to the home
- Characteristics of both your home and the local area, such as zoning specifications and environmental hazards
FHA appraisers will go a step further and examine extra features. These special appraisers will also assess things like appliances, electrical systems, plumbing, paint condition, and other HUD requirements.
What’s the difference between a home appraisal and a home inspection?
Although the two sometimes get confused, there are big differences between a home appraisal and a home inspection.
During the appraisal, the appraiser assesses the value of your home. That means they look at the market and your home’s features that influence its value. The ultimate goal with an appraisal is to pin down the fair market value for your home.
Alternatively, a home inspection is where a home inspector examines your house for safety. A home inspector will look for problems like mold, cracks in the foundation, termite damage, roof instability, and more.
What’s in an appraisal report?
An appraisal report is a detailed document that breaks down your property’s value. It digs into critical factors, such as the home’s location, condition, local market, and other important value drivers. Most commonly, appraisers use the Uniform Residential Appraisal Report to record the results of their work. Here are a few areas most appraisal reports cover:
- Your home’s exterior and interior conditions
- The home and property’s size or square footage
- The value of living areas
What if you have a lower-than-expected appraisal?
If your home’s appraisal comes in lower than your accepted offer, it’s not an ideal situation for your home sale. However, you don’t have to panic. You still have a few options if you receive an appraisal that’s lower than you planned:
- Renegotiate the deal: Since the buyer’s lender will likely be putting up less funding (lenders are loath to finance the purchase of an overvalued asset), your buyer will have to come up with more cash to cover the sale. However, you could re-negotiate the deal, so that they either agree to make up the difference in cash or you strike a lower asking price.
- Fill the buyer’s gap: You can cover the amount of funding that the buyer is missing out on. In this scenario, you would keep the original pricing agreement, your buyer would receive financing based on the lower appraisal price, and you would pay the difference.
- Cancel the sale: It may not be ideal, but you may be able to stop the sale, re-evaluate your sale price, and put your house back on the market.
Tips for avoiding appraisal problems
If you want your home’s sale to go smoothly, it’s important to do everything you can to avoid agreeing on a price that’s above its appraisal value. Here are a few ways you may be able to boost your home’s value before appraisal day:
- Set a correct price by working with a top agent: In setting a price, your agent will have performed a Comparative Market Analysis, looking at recent sales of similar homes in your area to get an up-to-date understanding of your home’s value. This document, along with any other offers you may have received on your home, can help justify your price.
- Fix issues ahead of time: An appraiser is required to report on any adverse conditions observed during the property visit. Addressing any issues beforehand can prevent unpleasant surprises during the appraisal. Consider a pre-listing inspection to identify problems, create a strategy to address them, and include known issues as factors in setting a price.
- Note property repairs and upgrades: If you’ve added new roofing, siding, a new cooling unit, or other value-adders, let the appraiser know. They may spot these additions on their own, but highlighting them and providing documentation will make their job easier and increase your odds that they won’t go overlooked.
- Show a well-maintained house: An unmade bed or stack of boxes isn’t going to ruin your home appraisal since appraisers are trained to look beyond the mess. However, it’s never a bad plan to tidy up, put dishes in the dishwasher, vacuum, and clear countertops before an appraiser comes through. This will help them better assess your house. In addition, while cosmetic factors may not matter, signs of neglect certainly can.
Trust the home appraisal process
Remember, the home appraisal process is designed to help protect people during a home transaction. Most appraisers are professionals who want to arrive at the most objective valuation of your home. So, as long as you understand the appraisal process and take a few steps to prepare, you should have everything you need to enter appraisal day, and your final sale, worry free.
Header Image Source: (Samantha Schwartz / Burst)