Understanding Residential Appraisals: The Homeowner’s Essential Guide

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Waiting for the results of a residential appraisal can make you teeter between anxiety—“They said our house is worth what?”—and relief: “Yes, our price is right!” Yet as important as an appraisal is on the way to the closing table, many homeowners tend to misunderstand the overall process.

“A lot of times when I’m going into a listing appointment, I will ask the client if they understand that we need to sell the home twice: not only to the buyer, but also to the appraiser,” says Christie Wilkins, a top-selling real estate agent in the Duluth, Georgia area.

Starting out at the right price point is critical. Statistics from the National Association of Realtors show that appraisal issues accounted for 21% of delayed contracts and 11% of terminated contracts in December 2020.

“It’s never fun for a seller when you go under contract and then three weeks in, you find out that your home hasn’t appraised and your deal has the potential to fall apart,” Wilkins says. “I always like to walk them through what happens in that particular situation and what the options are.”

Great idea! Consider this your residential appraisal walkthrough, covering an appraiser’s general qualifications, how these professionals calculate value, and some common misperceptions about residential appraisals.

A woman on an iPad looking at a residential appraisal.
Source: (Tetiana SHYSHKINA / Unsplash)

Starting the appraisal process

As a seller, you can request a pre-listing appraisal, which can help you and your agent set an asking price if your market is changing fast or if you have a particularly unique home for which finding comparable properties (or “comps”) might be difficult.

According to Mike Ford, a Southern California-based general certified real estate appraiser since 1986, paying $450 to $550 is typically the minimum amount necessary for a credible home appraisal. Fees vary based on factors like the size of your property, where you live, and the overall complexity of the appraisal.

In a typical real estate transaction, though, you as a seller don’t have to do anything to get the ball rolling. The buyer’s mortgage lender will contact a third-party appraisal management company (AMC) to arrange for a residential appraisal, which verifies for the lender that the house is worth what the buyer wants to borrow for the purchase.

A residential appraiser must be:

Licensed and certified:

An appraiser must be licensed or certified in your state, according to the Appraisal Institute of Chicago, Illinois, a global professional organization of real estate appraisers since 1932.

Some appraisers have additional designations because of their education and experience, such as an SRA (Senior Residential Appraiser) designation for appraisers knowledgeable about analyzing and valuing residential real property.

Don’t be nervous if you happen to get a trainee appraiser, adds Mason Spurgeon, a certified general real estate appraiser since 2004 who handles appraisals in Missouri, Illinois, and Iowa.

All appraisers must work as trainees first, and they take courses in appraisal principles, procedures, and uniform standards of appraisal practice, he says. Plus, a certified appraiser takes responsibility for a trainee’s work.

Unbiased and independent:

While you won’t choose the appraiser who visits your property, the buyer won’t, either, because the appraiser’s client is the buyer’s lender. Appraisers are supposed to be independent, third-party experts — or “an objective and unbiased source of real estate information” — who work for a flat fee, not a commission. “Neither the lender nor the consumer benefits by entering into a mortgage that is more than the value of the property,” the Appraisal Institute writes.

Geographically competent:

An appraiser might have a large coverage area, but they should be somewhat familiar with the previous sales and market conditions wherever they’re evaluating property.

“If you get an appraiser who doesn’t really know that neighborhood and the building products and everything else, you can really see some low values,” Wilkins says.

This also comes into play with new economic developments, such as if Amazon.com plans to build a distribution center in your area. Your corner of the market might be hopping, but an appraiser unfamiliar with this news could be out of their element and might pull sales to compare to your property that are too old. That’s why it’s wise for appraisers to ask colleagues about an area that’s new to them.

Two people looking at a residential appraisal.
Source: (Romain Dancre / Unsplash)

Gathering relevant paperwork and information

An appraiser’s job involves a review of public records and comparable sales, as well as an inspection of your property’s interior and exterior. “We don’t turn the faucets on or that sort of thing,” Spurgeon says.

“We walk through it and do the best we can to see the surface amenities.”

Regardless, you should make sure that your property is tidy and accessible so that an appraiser can measure and view it accurately. Also, gather any relevant paperwork or digital documents, which may include:

Your most recent tax receipt or deed:

Appraisers find legal descriptions or parcel numbers helpful, provided they’re accurate. Your home’s square footage, easements, census tract, and source of utilities are among the many pieces of information that an appraiser gathers for their final report. “I’m very meticulous when I measure the outside of a home. I use a laser,” Spurgeon says. “Sometimes the assessor doesn’t measure correctly.”

Covenants and fees related to a homeowners’ or condominium association:

When you have your home appraised, you’ll need to be transparent about HOA fees and the like. New owners need to know about any rules or restrictions they will need to abide by, as well as the details of any dues or fees. HOA and other community fees are especially important to the buyer’s lender who needs to ensure the buyer can afford the fees on top of their mortgage.

A list of major home improvements and upgrades, including dates of installation, costs (include receipts), and permit confirmation (if available):

Appraisers must note the age and design style of your home, the type of attic and foundation, any car storage, the type of heating and cooling, appliances, and amenities. So any material that you provide can support the reasoning for your asking price. Wilkins suggests leaving this information in a spreadsheet on the kitchen counter for easy access.

Include information about neighborhood amenities, such as walkability and schools, if you can.

“There are going to be some things that an appraiser can’t physically see, and that can definitely be helpful. I did have a seller who did this, and they ended up having the highest appraised value in the neighborhood,” she says.

A kitchen used to depict the process of residential appraisal.
Source: (Clayton / Unsplash)

How an appraiser approaches value

Depending on the type of property, an appraiser calculates value using one of these methods that the Appraisal Institute describes:

The sales comparison approach: This is the most “apples to apples” comparison, where an appraiser compares the subject property to others of similar size and amenities, making adjustments for location, physical and economic characteristics, zoning, and even financing. “We shoot for at least five to six [comparable listings],” Spurgeon says.

The cost approach: Think of this as the sum of the parts equals the whole. An appraiser figures out the value of the land as if it were vacant, plus what the new cost of improvements on the property would be, minus depreciation. “This approach is particularly useful in valuing new or nearly new improvements and properties that are not frequently exchanged in the market,” the Appraisal Institute notes.

The income capitalization approach: This focuses on the value of the income that a property could produce, something that turns up more often with commercial and rental property than during a residential appraisal. An appraiser might calculate a property’s expected gross income along with its anticipated annual operating expenses.

For a residential appraisal, Spurgeon uses either the cost approach or the sales comparison approach, depending on the age and style of the property. For instance, the cost approach “is tough to do on a late nineteenth century home. You’ll have twelve-foot ceilings and trim that you can’t replace.”

If a property has particularly unique features and finishes, Wilkins says that she’ll provide an appraiser with the comparable properties that she used to arrive at the asking price. “I do a lot of luxury properties, and … you can’t just go based on square footage. The interiors are going to be different, from the quality of the woodwork and the cabinetry and the granite. … So certainly when I have a unique [property], I’m going to utilize those comps and set those out as well for that appraiser in advance.”

In addition to those calculations, appraisers take other factors into account, including:

  • Functional obsolescence: If your property’s layout and size is much different from other properties in the current market, an appraiser will note that as a loss in value. “Let’s say you have to walk through one bedroom to get to the other bedroom. Or the side walls are too short for modern equipment. We see that a lot on farms,” Spurgeon says.
  • External obsolescence: Anything that reduces the value of the home outside of the home itself, such as living near neighbors whose own home is an eyesore or a bustling street. For instance, people in Beverly Hills, California, who live about a block from the freeway could have a home valued at 10%-20% less than others several blocks away, purely because of the noise, Ford says.
A woman looking at a residential appraisal on a laptop.
Source: (Mateus Campos Felipe / Unsplash)

3 common misunderstandings about residential appraisals

With the abundance of home valuation tools online and different industry terms for appraised vs. market value in real estate, it’s only natural that many homeowners have some misunderstandings and misperceptions about residential appraisals. Here are a few common ones:

Misperception #1: An appraisal confirms the sale price.

Because sellers and buyers have emotional attachments to a home, they often assume that an appraisal is wrong if it doesn’t match the listing or contract price, the Appraisal Institute says. But an appraisal is only meant to reflect fair market value.

If an appraisal is low and the contract value can be supported, you’ll need comps to prove it. Wilkins said one seller terminated a contract involving a four-bedroom, 2,500-square-foot home after the appraisal came back $12,000 low. “Based on the comps that we had pulled, that was below value for that home.” A second buyer and appraisal later, the sale went through.

In other instances, an appraisal may save a buyer from overpaying for a home. That way, if said buyer ever falls on hard financial times and has to sell the home, they ideally won’t suffer as big of a loss because they purchased it at the right value to begin with.

Misperception #2: An appraiser never changes their report.

Wilkins has found it rare for an appraiser to modify a report unless there’s an error, such as the appraiser listing square footage incorrectly or mistaking a granite counter for laminate.

Ford echoes that you can submit what’s called a reconsideration of value to the appraiser. However, about 85%-90% of the time, the appraiser will be able to back up their opinion of value.

However, Spurgeon says appraisers do make adjustments. For instance, one of his colleagues recalculated a residential appraisal after an agent pointed out two comparable sales that the appraiser had overlooked. “An appraiser will admit when we’re wrong,” he says.

Misperception #3:  You can’t talk to the appraiser while they’re at your house.

Your real estate agent may advise you to give the appraiser space to work, much like with a home inspector, but some appraisers don’t mind chatting with homeowners while taking measurements and checking out the property.

An appraiser’s questions might even prompt them to provide information they’ve previously overlooked. “They follow me around and talk to me,” Spurgeon says. “It’s also nice to have the person there in case you see something: ‘There’s a hole here. What happened there?’”

Even though a residential appraisal can be nerve-racking, agents say to bear in mind that you and a buyer ultimately want the same thing: reassurance of a property’s worth.

“I would definitely recommend that a seller do everything possible to make sure that they’re going to get the most amount of value when it comes to an appraisal,” Wilkins said. “Because if you get the contract price, obviously, that’s good. But if it goes over and above, that’s going to make a buyer feel really good, too, like they’ve made a really good investment.”

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