An appraisal is a key part of the home buying and selling process.
If you’re buying a home with a loan or refinancing your mortgage, the appraisal will impact the amount of loan you are able to get.
If you’re selling your home, you want appraisals to go well to support potential buyers’ financing.
What is an appraisal?
An appraisal is a report of a home’s value usually prepared for a lender. A trained and licensed individual called an appraiser will compile and submit the report according to specific criteria. The appraisal typically occurs after the seller has accepted the buyer’s offer, and the lender is getting the paperwork ready for the loan.
An appraisal is used to determine if the amount of the loan is appropriate based on the home’s condition, location and features. Lenders typically don’t want to loan more money than a certain percentage of what the home is worth. The lender wants to be sure they can sell the home to cover the costs of the loan if the buyer defaults.
If the property appraises for the same or more than the contract price, buyers will typically receive the loan amount they asked for. If it appraises for less, the lender may reduce the amount of the loan, according to The Balance. That could jeopardize the sale.
An interesting fact is that federal guidelines prevent many lenders from picking a specific appraiser. Instead, they typically randomly select an appraiser from a pool of qualified appraisers, or will have an appraisal management company select one of them.
What happens during an appraisal?
In general, Bob Gorski Jr., a certified residential appraiser based in Phoenix, needs about six to eight hours to finish an entire appraisal. He starts by researching the home. He looks at the location, such as whether or not the home is on a busy street, and tax records. He then books an appointment and visits the house.
An appraisal home visit will typically take about one hour, says Gorski. For about 30 to 40 minutes, Gorski will measure the square footage of the interior of the house, minus the garage or any unpermitted space, and ensure there’s no discrepancy in the reported versus actual square footage.
The three most important factors of the appraisal are the square footage of the home, any home upgrades or renovations, and the comps. Comps, or comparables, are homes that are similar in size, age, condition and location to the home that have sold within past six months to a year. The idea is that home sales similar to the appraised home can help assess whether the contract price is in line with the local market.
“The square footage is the big thing. That drives a lot of the appraisal,” says Gorski. “The square footage drives what the comparables are.”
He’ll photograph bedrooms, the kitchen and other rooms, and takes notes. He looks for upgrades, such as newer cabinets, flooring, and renovations. Those things have value. Homes with upgrades are usually worth more than homes without those upgrades.
For the next 20 minutes, Gorski will drive around the neighborhood and check out the comps. If an appraiser doesn’t have enough homes to work within the immediate neighborhood, he might increase the radius he uses to find comps. Gorski says he looks at anywhere from three to nine comps. Many lenders require one or two active or pending listings in the comps analysis, according to Gorski. He tends to include three to five closed listings.
Gorski typically submits his appraisal to the lender two to three days after the appointment. He will sometimes revisit a neighborhood, as well as the surrounding neighborhoods if he needs to get a more accurate picture of the area.
Sellers are welcome to stay during his visit, he said, since they can field any questions he might have about the home. But they don’t have to be present.
Buyers typically pay for the appraisal. Gorski’s standard fee is $400, but can range from $350 to over $500, for rush fees and complex properties, like those with multiple detached buildings. An appraisal management company may also add their fee. The national fee for an appraisal ranges between $250 and $450, according to Home Advisor.
What is in an appraisal report?
The appraiser submits an appraisal report to the lender, noting the value of the home, and how that value was reached. Lenders are required to give buyers a copy. Gorski says a typical report runs just over 30 pages and can include:
- Condition of the home and notes about the neighborhood
- Information about any upgrades
- Interior and exterior photos
- Maps of the home and overall lot
- Notes about the neighborhood
- Information about the comps
- Description of how the appraiser determined the value
- The home’s value
What sellers need to know
As a seller, it’s always helpful to have the home appraised for a higher value. Here are some steps you can take to give the appraiser the best possible impression of your home.
1. Keep receipts or photos of recent upgrades or renovations
Gorski says renovations made within the past five years are most valuable. But if you’ve made any changes in the past 10 years, it’s probably worth mentioning. Feel free to note any newer appliances that are part of the home like a stove or dishwasher. Having all of this prepared before the appointment is key. You want to make sure that factors like major upgrades or renovations are taken into consideration during the appraisal.
“The upgrades are important because they have value,” says Gorski. He suggests home sellers make a list of upgrades, so they don’t risk forgetting a renovation that may add value.
2. Clean the house
“You do want it to look as nice as you can without killing yourself. I don’t care that the laundry is piled up on the bed or if there are dishes in the sink. That doesn’t matter. The rest of it does,” says Gorski.
He’s looking at the overall structure of a home and trying to imagine it without the furniture. He checks the condition of the flooring, fixtures and upgrades. The cleaner the home is, the more those key elements will shine. “The better it shows, the better the value’s going to be,” he says.
3. Hire a home inspector and make any noted repairs
“A home inspection is well worth the money to figure out if there are any major roof issues or anything else,” Gorski says. “You want to know if there are any big problems.”
That way, you can fix the issue before the appraiser arrives or drop the price of the home to account for the needed repairs.
He looks at home inspections maybe 5 to 10 percent of the time, and only if he has any questions about the home, if he suspects any problems (like a leaky roof or any foundation cracks) or if the home has been vacant. It’s important to note that an appraisal is not as thorough as a home inspection and more about square footage and comps than the exact home condition.
How to appeal an appraisal
If you’re unhappy with the appraised value of your home, you can submit a formal “reconsideration of value” to the lender to ask for an adjustment. You can list why you feel the appraisal was incorrect or show that the comps used weren’t ideal.
Phoenix home sellers request maybe 5 to 10 reconsiderations of value out of the 250 to 300 appraisals that Gorski finishes annually. In his opinion, the comps sellers send to reconsider aren’t the best. “Anytime I’ve gotten those, 19 out of 20 don’t really help the owner,” he says. But “it can’t really hurt the seller.”
If the appraisal comes in lower and is accurate, you may have to lower the price of the home. You don’t have to accept a deal if you specified in the contract that your property be valued at a selling price or higher, according to The Balance.
What home buyers need to know
For buyers, if the appraisal comes in at the same or higher value than the contract price, the transaction typically continues as planned. If the appraisal comes in lower, this can delay or even stop the sale.
If you negotiated a loan contingency, a low appraisal may actually work out in your favor. You can ask the seller to lower the price of a home to reflect the value the appraiser assigned it.
However, if the seller doesn’t budge and if you really want the home, you can put down more cash to cover the gap created by the appraisal value and the sales price.
Regardless of whether you’re a buyer or a seller, having a solid understanding of how the appraisal process works can only benefit you.
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