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. You may even need an appraisal if you’re looking to get rid of private mortgage insurance (PMI) or refinance your mortgage.
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 11 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.
Since appraisals are really for the protection of lenders, appraisals for mortgage lenders are governed by Appraiser Independence Requirements. These requirements are meant to ensure that appraisers — and the appraisals they make — are fair and independent, and don’t favor the bank’s interests too much.
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, an appraiser can help you decide which improvements will most increase your home’s value, and how to get the most bang for your buck when remodeling.
If you’re selling your home in a competitive, buyer-friendly market, consider hiring an appraiser before you list your home. A professional will be able to tell you whether adding a back deck, upgrading your kitchen finishes, or another type of home improvement will help your home sell faster and for more money.
3. You may not own the results of an appraisal – even if you paid for it
One of the tricky pieces of appraisals is that the party who orders the appraisal — not necessarily the party who foots the bill — ultimately owns the results of the appraisal. If you’re buying a home and your lender orders an appraisal, that fee — usually $200 to $500 will be rolled into your mortgage or closing costs. But the lender, not you, will own the results of the appraisal.
Because of this, the lender isn’t required to give you the results of the appraisal, though many do. Also, if you switch to a new lender in the middle of the home buying process, you may have to pay for another appraisal.
If you can afford it, an independent appraisal before you put an offer on a home could be helpful. However, you may have to pay extra for this appraisal if your lender will not accept its results.
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. Though the forms are standard, knowing what to look for and how to assign value takes real skill.
5. Many variables play into the appraisal process
If you 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 under experienced 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, many lenders work through them now.
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. An appraisal is not the same thing as an inspection
Many homebuyers make the mistake of assuming that an appraisal and an inspection are the same things. But there’s a reason these are on two different line items in your lender’s Good Faith Estimate. They’re not at all the same!
A home inspection is a detailed summary of the current condition of the home, and it’s meant to protect you as the buyer from walking into a fixer-upper when that’s not what you want. Home inspectors look at the roof, the floors, any electrical or plumbing work that can be seen easily, the foundation, and even what’s growing around the house. Inspections specifically look for defects that could cost you, as the home buyer, more money down the road.
An appraisal will take into consideration some of the same information, such as the age of the home’s roof and HVAC system. But it’s more of a big-picture overview of what the house is worth. An appraisal also looks at more than just that particular house. It also inspects sales of surrounding houses, data from the community, and other factors that could influence the home’s value.
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.
In a nutshell, your home inspector only cares if the sink in the kitchen functions properly and doesn’t leak. The appraiser cares about that, too, but also wants to know how modern the sink and fixtures look.
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.
Tip: If you have reason to question the accuracy of an appraisal, take the time to look up the value of the home online. A service such as HomeLight can provide an estimate in two minutes or less. It’s not “official” but it will give you an idea of if the appraisal is in the right “ballpark.”
According to the San Francisco Chronicle, one way to get past this is to supply more money upfront. Most traditional lenders will lend up to 80 percent of the value of a home. 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 get past this requirement – 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 home 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.
Related: Running Your Own Comps
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 three to nine months. But 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 appraisals. 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.
11. There are different types of appraisals
This fact is less essential if your lender is ordering an appraisal. They’ll order the type they want. But if you’re ordering an independent appraisal, you’ll want to know what type you’re ordering and what it’s good for. The types of appraisals all look at similar information, but they may offer different values depending on the valuation method.
For instance, the Cost Approach looks at how much it would cost to build the home over again at today’s prices. This is the type of approach you might want if you’re looking at getting a replacement cost insurance policy on your home. The Sales Comparison Approach looks at other home sales in your area of similar homes, and tries to estimate your home’s value based on what buyers are currently paying. And the Income Capitalization Approach is a specific type of appraisal for investment properties. It tries to project how much income a property could produce based on the current market.
It’s likely that your mortgage lender will ask for a Sales Comparison appraisal, but it never hurts to be informed of the different options in this area!
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