With a stellar offer in hand, you’re holding your breath for what comes next: the home appraisal.
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.
(Video Credit: Corinne Rivera / HomeLight)
This type of situation happens all the time. As of June 2019, “appraisal issues” were the cause of 25% of real estate contract delays, second only to issues related to obtaining financing (35%) according to the National Association of Realtors (NAR).
There’s no getting around the home appraisal if your buyer is taking out a mortgage to purchase your home. You also can’t wave a magic wand to raise the fair market value of your house. It’s worth what it’s worth. But that doesn’t mean you should shouldn’t educate yourself about the appraisal process.
“Both the buyer and seller are a basket case of nerves by the time we get involved,” said Mike Ford, a Southern California-based general certified real estate appraiser since 1986. “Everybody is suspicious of everybody else toward the end of the escrow, not necessarily for any reason but because a lot of the delays and issues to be overcome are not fully understood.”
Let this advice from top real estate professionals and professional appraisers who have been through hundreds of home appraisals guide you through every step of the way.
Before the Home Appraisal
At what stage during the home sale does the appraisal occur?
The home appraisal occurs after you accept an offer and usually within seven days after an inspector has reviewed your home.
In other words, once you and the buyer have worked out details about a price, repairs, and credits—essentially all the financial give and take—the lender will send in an appraiser to assess the fair market value of the home.
There is another option, though. As the seller, you can opt to get a pre-listing appraisal, which can help you lock in an asking price that will get you all the way to closing.
A pre-listing appraisal can be especially useful in the event that you face certain challenges in pricing your home. This can happen when:
- You have a unique home that’s hard to find comps for.
- The real estate market is on a big upswing or downswing so prices are changing fast.
Who pays for the home appraisal, and what does it cost?
Online you’ll see the cost of an appraisal quoted at $300-$400. However, according to Ford: “Almost anywhere in the country, the minimum amount necessary for a credible home appraisal is likely going to be somewhere between $450-$550.”
However, a buyer or seller can’t order an appraisal directly from a company of their choosing, if it’s for the purposes of the loan. A lender will instead go through a third-party appraisal management company (AMC) for an impartial opinion. It is the buyer’s responsibility to pay for the assessment, and the fee is set by the lender, not the home appraiser.
“What happens is that a national number that is right smack in the range of $650-$750 will be quoted by the loan officer,” said Ford. “And that number tends to hold firm.”
Technically, the cost of the appraisal is subject to an increase if the property proves to be more complex that it was originally scoped to be. Per TRID (the TILA RESPA Integrated Disclosure aka “Know Before You Owe”) rules, the lender would need to show that there was a valid “change of circumstance” to apply the appraisal up-charge to the buyer.
What’s the point of an appraisal, anyway?
The objective of an appraisal is to provide an ‘independent and impartial analysis of real property,’” according to NAR. The appraiser’s client is the lender. However, ultimately the appraisal protects a buyer against paying more for a home than it’s worth, which could put their financial future in jeopardy.
“Say the buyer loses their job a year later,” says Ford. “If they’re upside down they can’t sell the house and they’re going to have a foreclosure. If they buy it at the right value and something happens a year or two into it they can get out with their skin intact. They may not have any profit, but they may not suffer any loss or at least as big a loss.”
To come up with an accurate value gauge, the appraiser conducts deep research of the comparable sales data and uses an on-site visit to verify the home’s size, features, and condition.
Why would an appraisal come in under contract?
There are a few primary reasons homes fail to appraise. At the top of the list:
1. The contract price is just plain over market value.
In rising real estate markets it’s common for buyers to compete for a house and drive up the price above market value. At that point the biggest mistake sellers make is assuming that the buyer will bring extra cash to the table as needed.
“In the real world people don’t have all that much extra money to add to a deal,” explains Ford. “It’s usually: ‘What’s the most that we can qualify for and have the down payment and closing costs for?’”
This is also why pricing your house right from the start is so key. Don’t hire the agent who is going to flatter you with an empty promise to sell your house for more. Find one who’s done their homework and has the comps to prove it.
If you go with the higher price, find a buyer who will pay cash or ask to verify proof of funds before you get under contract.
2. An appraiser finds an issue with the house that impacts its value.
In some cases, an appraiser will identify an issue with the property that must be factored into the appraisal.
This could be a room addition that doesn’t have a permit. In that case the appraiser may mark the room as a “cost to cure” line item on the report, which could lower the appraised value for a given amount.
Some types of loans like FHA (Federal Housing Administration) also require specific problems like broken or cracked windows to be corrected before a house can appraise.
3. The appraiser was inexperienced or doesn’t know the area.
There are a lot of nuanced factors that go into appraising a property accurately. “Geographic competency” or an appraiser’s knowledge of the local area can make a big difference in whether an appraisal arrives at the true market value of a home. Other issues, according to Ford, can be that the appraiser rushes through the data compilation or applies short cuts.
What can you do to prepare for a home appraisal?
The appraiser shows up to do a critical job. Are there any ways you can help them out or be prepared for their arrival?
“You’ve got to keep [the house] clean, you have to make it look really presentable for that appraiser,” Krueger says.
Here’s a short list of things you can do to prepare for an appraisal:
- Deep clean the inside of your home.
Act like you are showing the house all over again to buyers. Use our essential guide to cleaning like you mean it to make sure you don’t miss a spot. Definitely make sure you’ve dealt with any issues related to pests and pets! “Every appraiser could tell you stories of walking into a house and looking down at their pant leg and seeing it literally black with spots from fleas,” says Ford.
- Secure your pets.
It’s a basic courtesy and allows the appraiser to work more efficiently, even if he or she is a dog person!
- Spend an afternoon cleaning up the yard.
No need to get too fancy. Just make sure the front of the house looks nice and tidy. Pull any weeds, mow the lawn, trim the hedges, edge the grass, brush away cobwebs, and clear leaves and debris. You can’t necessarily put a price on curb appeal through quantitative appraisal methods but appraisers do take it into account qualitatively when reconciling that final value.
- Touch up your paint on the outside of your home.
It may not seem like a big deal, but appraisers will factor peeling paint into their evaluation, especially if they are doing an FHA mortgage appraisal. If you don’t have extra paint in your basement, you can use a razor blade to take a small swatch from the wall (to be touched up later), and color match it at a paint store.
- For the love of all that is holy, don’t water the lawn or run the sprinklers.
Appraisers don’t want to track mud into your house! And they need to measure around the outside of your house to get measurements.
During the Home Appraisal
What appraisers look for in a home
Nearly all appraisers use the same form during an appraisal, the Uniform Residential Appraisal Report. This form asks specific questions about neighborhood demographics, housing trends in the area, available utilities, measurements and details about the home, property condition, and how the house fits into the surrounding neighborhood.
Specifically, in addition to noting upgrades made to the property, appraisers are looking for the home’s:
- Property site
- Construction quality
- Roof and foundation integrity
- Gutters and siding
- Exterior condition
- Square footage
- Functional layout
- Number and size of bedrooms, bathrooms, and kitchens
- Included utilities
- Health and safety accoutrements
- Interior condition
- Structural integrity
- Code compliance
“Appraisers go for more of the black and white type view of a home,” Krueger says. “They don’t take a lot of the upgrades into consideration. It’s more the basics of the home.”
Their goal is to figure out how the home compares to other similar properties in the area. The appraiser will take the measurements and photos, find comparable properties nearby, and compile all the information into a report that pegs the home with a real-world selling price.
That’s why it’s important to keep the home in tip-top shape; if an appraiser sees a house that looks junky or unkempt, they’ll have reason to believe that the house itself hasn’t had proper maintenance, which would lower the value of the property.
How long does a home appraisal take?
All told, the actual appraisal process inside the home can take anywhere from 15 minutes to several hours.
While the appraiser is there: Should you stay or should you go?
Homeowners are not required to leave, but it may be for the best—that way you won’t be in any of the photos or getting in the way of any measurements.
If you do stay in the house while the appraiser is there, that’s OK. But know that you could be making the appraiser’s job a little tougher.
No one will fault you for being chatty but…“It’s very hard to walk into your kitchen, and try to make note of all the appliances, built-ins, non built-ins, vents, microwaves, plug adequacy, ground fault interrupters,” says Ford. “All the things that we look at at a glance and we’re trying to make notes while the owner is telling us how 15 years before they thought the roof had a leak someplace.”
However, it’s a good idea for your agent to be there. He or she can answer questions about your house such as “Was this garage permitted?” and “Are the solar panels leased or owned?”
Plus: “We provide comparable sale information ahead of time if the appraiser asks for them,” Krueger says. “We also provide information about how we came up with the suggested price and any types of features or upgrades in the home that maybe the appraiser can’t see with their own eyes.”
After the Home Appraisal
When will you get the results of the home appraisal?
Once the appraiser leaves, you’ll no doubt be anxious to know the value they’re giving to your home.
The appraisal report could come back in about a week but may take at least 10 days. Know the appraiser may need to call around, check for permits, and verify certain information for the report. If you want the appraisal to come back sooner, make sure your agent is on top of communicating with the appraiser on any questions they might have about your house and its permit history, etc.
As the seller, you won’t automatically get a copy of the report, but you can request one and the lender will have to provide it to you in 30 days time. If the appraisal came in under the contract price, your real estate agent will be able to fill you in on the details right away.
The report, which is typically about 10 pages or less (though some can stretch to 100 pages), will contain local comparable properties with photos and details of each property including the home being appraised, the appraised value, how the appraiser determined the value, and what factors the appraiser took into consideration.
How long does it take to close on your home after the home appraisal?
Once the report is in-hand, you have a couple options. If the appraised value is about the same as your buyer’s offer, congratulations! Get ready to close on your house.
“Once the appraisal is done, it’s just a matter of underwriting,” Krueger says. “I’ve even seen it where the appraisal is done and we close the next day.”
How can you challenge a low appraisal?
On the flip side, if the appraisal comes back lower than expected, you may have some extra work to do.
Generally you have a few options:
Get a reconsideration of value based on comparable sales data.
If the appraisal came in under contract, your gut instinct may be to call up the appraiser and ask about how they came up with that number. But appraisers can’t talk to you about the value of the home you’re selling (and they can’t talk to the buyers, either).
The challenge to the appraised value has to originate from the lender, and better yet if you can bring evidence to the table. “When somebody thinks the appraisal came in low the best thing to do is to get proof in the form of other comparables in the same neighborhood,” says Ford.
Then 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, according to Ford. That’s because there’s usually a reason why the new comparable data thrown into the mix after the fact isn’t apples-to-apples.
Let’s say, though, that there are two identical homes in the same location but the appraiser pulled the lower value of the two to appraise your home. Turns out one of them was a divorce sale and that’s the only reason it sold for less. Then you might have a case that would prompt an ethical appraiser to own up to the mistake and modify their report.
Sellers can also order a second appraisal, but that can be expensive and often requires switching to a new mortgage lender, Krueger says.
Worth it? Maybe. Krueger once saw a rise of $30,000 between the first and second appraisal on the same house.
Negotiate with the buyer to save the deal.
Oftentimes, the buyer wants to buy your home just as much as you need to sell it. That means even if the appraisal comes in high, you might be able to work out a deal.
Kate Silver, a Chicagoan who went through the appraisal process in April while buying a home, had to beat out nine other buyers and still hope the appraisal price matched her offer.
“There was definitely some fingernail biting taking place while awaiting our appraisal,” Silver says. “Anxiety was high, because we knew the bank would only be willing to give us a loan for the home’s appraised value, and we would have to make up the difference.”
When you boil it down, you can:
- Reduce your asking price to match the appraisal.
- The buyer can bring the extra money to the table.
- You can meet somewhere in the middle.
Use your real estate agent to your advantage; they can often negotiate with the buyer to save the contract.
“The most important thing to know is that it’s just an opinion at the end of the day,” Krueger says. “It’s one person’s opinion. Not all appraisals are going to come back the same. I’ve seen wide differences in what two different people would appraise a house at. It’s not the end all, be all. There are options out there.”
Article Image Source: (paulbr75/ Pixabay)