Are you preparing to buy a home or sell the one you’re in? If so, the home appraisal process will be incredibly important.
If you’re selling your home, a professional appraisal can help you set a fair, realistic listing price. If you’re buying a home, your lender will require a professional appraisal to ensure it isn’t loaning you more money than a home is worth.
In either position, a bad appraisal can become a big problem. Understanding as much as possible about the appraisal process can help protect you. With that in mind, check out these 10 little-known facts about home appraisals:
1. A home appraisal is really about protecting the lender
Many people mistakenly think an appraisal is about protecting the buyer. After all, no one wants to pay $300,000 for a home that’s worth $275,000. And in this way, an appraisal can keep a homebuyer from making a poor decision.
But the truth is, a home appraisal is about protecting the lender. Lenders take a big risk when writing a mortgage loan, and an appraisal helps mitigate that risk. Without a professional appraisal, a lender might write a loan for more than the home is worth. If the homeowner defaults on the loan, the losses for the lender are larger and harder to recoup.
2. An appraisal can help you decide what and how to renovate
Home appraisals are most often used during a real estate sale. (Though they’re also used to value a home for a refinance, during a divorce, or for tax purposes.) If you’re thinking about selling your home, a professional appraisal can help you set a fair asking price. But a professional appraiser can also help you decide how to renovate your home before you list it.
For instance, an appraiser might point out essential repairs. Plus, according to the Appraisal Institute, looking at comparable sales in your neighborhood can help you renovate without making improvements you don’t need to make.
Changing the look of your home with a few coats of paint can make it more appealing to buyers. But cosmetic changes won’t boost the value of your home much. That’s why getting an appraisal first can help you make the right renovations and increase your home’s sale price.
3. You may not own the results of an appraisal – even if you paid for it
Many homebuyers are frustrated to learn they can’t see the results of an appraisal. As a homebuyer, the cost of the appraisal – $200 to $500 – is often paid through your lender. Even though you’re paying, your lender owns the appraisal.
While some lenders will give you the results of an appraisal, others may not. This also means that if you switch to a new lender, you may have to pay for another appraisal. Unless the original lender signs the first appraisal over, it won’t automatically transfer to your new lender.
As a homebuyer, it can be a wise idea to get an independent appraisal, if you can afford it. Keep in mind that you may end up paying for two appraisals because your lender may not accept the results of an appraisal it doesn’t order.
4. Appraisers use standard forms to complete the appraisal process
It may seem as if appraisers pull numbers out of the air when determining a home’s value, but they follow standardized procedures. The majority of home appraisers use the Uniform Residential Appraisal Report (Form 1004) by Fannie Mae.
Also, in many states, appraisers undergo a lengthy apprenticeship before becoming licensed appraisers.
5. Many variables play into the appraisal process
If you’re think an appraisal looks only at the home being appraised, you’re wrong. A home appraiser will look at many variables to determine a home’s price. Here are a few on the standard appraisal form from Fannie Mae:
- Neighborhood characteristics (Is it urban, suburban or rural? Is it growing or stagnant? What’s the neighborhood like? What is the school system like?)
- Home trends in the area (Are home prices increasing or declining? Does it take more than six months to sell a home?)
- Land use in the area (Is it mostly multifamily, single family, commercial, etc.)
- Zoning classification and description
- Available public or private utilities
- Public or private improvements to the street or alley
- The home’s foundation materials and condition
- The home’s exterior materials and condition
- The condition of the driveway and garage surfaces
- The home’s interior materials and conditions
- Any additional property features or physical deficiencies
- Three comparable sales from (usually) the last six months
Because so many factors play into a home’s appraised value, there is subjectivity in the process. A professional appraiser will judge a home based on industry standards. But because of that subjectivity, appraisals from separate, equally professional home appraisers can vary widely.
6. Appraisal Management Companies may employ underexperienced appraisers
Though many home appraisers have a great deal of experience, since the housing crisis the industry does have some problems in this area. Now your home appraisal is likely to be handled by an Appraisal Management Company (AMC).
Most appraisers used to work independently or on behalf of lending companies. Now, AMCs find work on behalf of appraisers, usually contracting it out to them. Because AMCs set lower rates, they cost lenders less and many lenders work through them now. AMCs can help protect buyers, sellers and lenders from fraudulent appraisals meant to put more money in someone’s pocket.
On the other hand, not all AMCs offer high-quality appraisals from truly experienced appraisers. One American Banker article notes that many appraisers sent by an AMC are unfamiliar with the local real estate situation (an important factor in any appraisal), or are simply under-experienced in general.
Talk to your lender about the AMC they use and do your homework. If that AMC has bad reviews, ask about paying for your own appraisal privately or working with a different AMC.
7. If you choose a third-party appraiser, the results may be subject to review by your lender
If your lender agrees, you may be able to hire your own appraiser outside of the lender’s system. This is a good idea if you want to see the results of an appraisal, or if you don’t trust the company your bank works with.
However, if you opt to pay for your own appraisal, the results may be subject to review by your lender – or your lender’s appraisers. This can result in higher closing costs. You can avoid this by having your lender approve your appraiser’s credentials before ordering your own appraisal.
8. An appraisal is all about a home’s current condition
Homeowners often make the mistake of ordering an appraisal when they’re in the middle of renovations, thinking it will expedite the selling process. But that approach gives you a lower appraisal than you would have otherwise.
An appraisal, whether for a buyer or a seller, is a snapshot of the home’s value at that moment in time. So even if the contractor is right there working on your kitchen remodel, the appraiser will still value the home as is, exposed subflooring and all.
This means that as a seller, you should wait until the renovations are complete before ordering an appraisal to officially set your home’s asking price.
This also means that the longer it takes to sell your home, the more likely its appraised value will change. Remember, an appraiser is also looking at your neighborhood and comparable sales. In the year it takes to get an offer on your home, nearby foreclosures or a shopping complex popping up across the street could drive your home’s value down. Likewise, if area home values are rising, your home could be worth more in a few months than what it appraises for today.
9. If the appraised value of a home is less than the purchase price, you may still be able to get a mortgage
As a buyer, you may be waiting on tenterhooks to hear the outcome of a home appraisal after you’ve put an offer on a home. If the appraisal goes well, you’ll be a homeowner. But if the appraisal sets the home’s value much lower than your agreed-upon sale price, it could spell bad things for you.
If a home appraises for well under the buying price, you will most likely be turned down for a mortgage. Remember, an appraisal is required to protect the lender from the risk of loaning much more than a home is worth.
According to the San Francisco Chronicle, one way to get past this is to supply more money up front. Most traditional lenders will lend up to 80 percent of the value of a home. So if a home appraises for $350,000, a lender will write a mortgage for $280,000. So if you agreed to buy that home for $375,000, you can – if you supply a $95,000 down payment.
Of course, if you don’t have that kind of down payment, you could renegotiate with the seller. If the seller wants to get out of the home, he or she may lower the purchase price.
If the buyer thinks the home appraisal is artificially low, which can happen when there are few homes sales or many foreclosures in an area, he or she may request a second appraisal. An appraiser who is more familiar with the local housing market may offer a different appraisal.
A lower than expected appraisal is likely to stall the sale of a home, but it doesn’t always cancel it.
10. There’s no set expiration period for an appraisal
Home appraisals don’t come with an expiration date. With that said, most lenders consider them valid for about six months. And if home prices in the area have been rapidly falling or rising, lenders may require a new appraisal more often than that.
If the sale process takes a while, you may want to talk to your lender about how long they’ll accept the appraisal. If their time frame is limited, consider waiting to order an appraisal so that it doesn’t expire.
There’s a lot to know when it comes to home appraisal. And the process and purpose of an appraisal can be especially confusing for first-time homebuyers and sellers. If you have more questions about appraisals – how much it costs, how it will be used, etc. – talk to your Realtor or lender. Trustworthy Realtors and loan officers can walk you through exactly what you need to know.