What is a Home Appraisal and How Does it Work?

When it comes to the value of a home, it may seem pretty straightforward. There may be some negotiating back and forth between a Buyer and Seller, but once both parties agree on a price, that should be it, right? Unfortunately, most of the time a contract is contingent on an appraisal. Especially when there is financing involved. Some buyers and sellers may even be surprised to find out that an appraiser must give their "stamp of approval" on the purchase price before moving forward.

Key Takeaways

• An appraisal is typically paid for by the buyer in a real estate transaction.
• Appraisers review the exterior and interior of the home. Measuring the square footage while looking at features of the home and possibly any safety concerns.
• Common problems with appraisals can be incorrect square footage, wrong bed and bath count, or major upgrades being left off the report.

What does an Appraiser Do? Appraisers do exactly what their job title implies. They appraise the value of a property and either confirm that the price of the home is fair and valid or report that the price is greater than what the contract price is. For those who are engaged in cash-only deals, an appraiser may not be necessary, but the majority of deals in the real estate world tend to involve a mortgage and a bank. Appraisals can make or break a deal. Understanding exactly who, why, and what the process is like is an essential step for buyers and sellers to understand.

What Exactly is Home Appraisal?

Home appraisers are licensed and certified professionals who a lender and/or bank hire typically through a 3rd party company to assess a home’s value before dishing out the necessary cash to make the purchase. Essentially, a lender wants to know that they are paying an appropriate price for the property before giving out the funds.

For example, if a buyer and seller agree to a purchase price of $400,000, the bank will want to check that the property is worth that amount. If an appraiser evaluates the home and property and tells the lender that the home is really only worth $385,000, the lender will expect that difference be made up by either the Seller reducing that sale price. Or the Buyer bringing additional finds to the closing to make up the difference.

An appraiser is going to take into consideration the homes exterior and/or interior and will take into consideration any requests that the lender has made. An appraisal is paid for by the buyer with the price typically being a few hundred dollars, depending on the location.

What do Appraisers Look for?

The appraisal process usually takes place early in the transaction. Some lenders prefer to wait until the buyer is past inspections (or the due diligence stage) to make sure the buyer is ok moving forward. That way there are no additional expenses to the Buyer if it is not necessary. The lender or bank typically uses a 3rd party company that will assign it to a local appraiser.

During an appraisal, there is an inspection that takes place where the appraiser will review the exterior and interior of the home and make note of any safety issues or concerns, along with features of the home like how many bedrooms, baths, etc.

They will typically take photos while they conduct their work and will be looking for different things depending on the type of loan. FHA and VA loans tend to have stricter parameters than traditional loans and this means that a home must pass a stricter set of tests during the appraisal inspection.

Appraisers will take note of the purchase prices of similar homes in the area and conduct a thorough research about recent listings to determine an appropriate price for the home relative to similar homes in the area. An appraiser could also decide that they need to take a cost-basis approach to valuing the home, which means they would estimate the cost of what it would take to build the home in the present day and combine that with the estimated value of the land.

The Home Appraisal Report

Most people will automatically look at just the appraisal value in their report. This is totally normal. Usually, the buyer will receive a copy of the report within 7-14 days after it has been ordered from the lender. It will contain numerous pieces of data about the home. Most importantly the current value. It will also include things like background info about market conditions in the area, characteristics of the property, and how long the appraisal is good for (usually four months),

There are times when the appraisal report may come in low or may want certain conditions or things addressed. If you disagree with the appraisal, you have the opportunity to challenge it in writing to the lender if there is a valid reason for any error you may suspect. Some buyers may even want to pay for a second appraiser to conduct another report. The second appraisal cannot be used by the lender to prove the home’s real value but may help make your case if battling the primary appraisal. Common problems with appraisals include incorrect square footage, incorrect bed and baths listed, or major upgrades being left off the report.

How a Real Estate Agent Can Help Through the Appraisal Process

If home appraisals sound like a headache, do not let this discourage you from embarking on your exciting home buying or selling journey. Many people believe that they can navigate the process solo with no issues but having a licensed and knowledgeable real estate agent in your corner makes a huge difference.

An experienced and professional real estate agent can ensure that the agreed-upon price falls in line with what the expected appraisal will find as the home’s appropriate value. This will prevent future headaches and the nixing of a deal that both sides have work diligently to accomplish for a significant stretch of time. Buyers often benefit from a lower-than-expected appraisal and can use that low appraisal amount as a bargaining chip at the negotiation table. Not all sellers will be willing to reduce their price at all or even significantly enough to match the lender but having a real estate professional who is experienced in making deals happen and is an expert negotiator can make a dead deal come back to life.

If you have questions about the appraisal process or are interested in learning more about buying or selling a home in general, contacting a licensed and experienced real estate agent is a crucial step towards ensuring a successful buying and selling experience.