When buying or selling a property, a home appraisal is a critical step of the process. But what is a home appraisal anyway? Quite simply, a home appraisal is a licensed appraiser’s unbiased opinion (and comprehensive report) of a property’s market value based on comparable recent sales in the neighborhood. Why should you care? It can affect the ultimate price of the home and if the deal goes through so it’s actually a pretty big deal.
How is a home appraisal used?
Appraisals are generally ordered by the buyer’s lender. The lender will compare the appraisal price to the final purchase price to ensure the buyer is not borrowing more than the house is worth. If the home is appraised lower than the final sale price, the buyer may be able to renegotiate a lower price. If the seller won’t lower the price, the buyer’s lender may ask that the buyer put more money toward the down payment in order to make up the difference.
The home appraisal matters to everyone in the transaction, but especially the lender. Homeowners, be sure to have the home ready for an appraisal to be done and get it scheduled in a timely manner. However, keep in mind that the facts of the home (square footage, number of bedrooms/bathrooms, upgrades, etc.) matter much more than if the house is tidy (like in a showing).
Why would someone get an appraisal?
People get appraisals done because they need to know the value of their home for a variety of reasons:
Before they sell their house
Sometimes homeowners get an appraisal done before selling their house so they can get a better sense as to what they should list the home for. Getting a realistic asking price can often help the home sell faster.
Refinancing a home
When you refinance, you are essentially replacing an old mortgage with a new mortgage and therefore need to justify to the banks that the home has equity associated with it.
Getting a home equity loan
Getting a home equity loan is different from refinancing because you are getting a second loan on top of your initial mortgage. The amount you are able to borrow is largely dependent on how much equity you have and if your home has decreased in value you won’t be able to qualify for this type of loan.
Applying for other loans
You may find yourself needing to apply for a cash or business loan, in which case you would need to use your home as a form of collateral. This would garner a home appraisal to ensure your home can actually be used as collateral.
Appealing a tax assessment
Property taxes are typically calculated based on the fair market value of your home. However, if you think they are too high, you can get an appraisal done to prove your home is not worth what the county property assessor’s office believes it to be. Be careful though because it may come in higher than what the property assessor’s office claims it to be worth!
What is the appraisal process?
Now that you know what a home appraisal is, you’re probably wondering how is a home appraisal done? An appraiser is required to take several steps to determine a property’s value. He or she will visit the property in-person and review recent sales of comparable homes. The data gathered during this process is combined and presented to you in a final report.
When you hire someone to appraise the property, it can take an hour or more, depending on the size of the home, the layout, and how the home appraisal is done. The appraiser will measure the square footage, count the number of bedrooms and bathrooms and look at the housing data provided by local county records to ensure accuracy.
Your home appraiser also will look at the major systems and structure of the house. Appraisers must look for damage (water, mold, etc.), overall plumbing, and the condition of the furnace and roof to assess the overall structure. Appraisers account for many home improvements and upgrades as well. This is perhaps the most confusing area for all parties involved, because there can be subjective or different opinions on the value of certain things (such as view).
The next step is for the appraiser to look at comparables, often referred to as “comps.” Comparables are similar homes that have recently sold in the general area or even a specific neighborhood or subdivision. Appraisers look for houses that share similar characteristics with the subject property, such as size, age and architectural style. Comps typically only include homes listed and sold within the past three to six months.
The last step in the home appraisal process is preparing a final report of value. This report will provide a complete property analysis, outlining how the appraiser calculated the home’s worth.
What are appraisers looking for?
Most appraisers use a standardized form to complete the appraisal. Below are some items that appraisers will be looking for when examining your home to conduct your appraisal.
- Location – The proximity of the home to schools, grocery stores or parks greatly affects the value of the property.
- Gutters and siding – Gutters and siding affects speed in which a home depreciates.
- Parking – Is there a dedicated parking spot or will an owner have the privilege to park in a garage?
- Conditions of the exterior – Appraisers will generally look at things like the condition of the roof, paint, brick, etc.
- Neighborhood Characteristics – Is the home suburban, rural, near schools, etc?
- Square footage – Depending on the going price per square foot, this can be helpful in determining the value of a property.
- Is layout functional? – Is the home open or is there a half bath instead of a full bath somewhere in the home? Layout can be a contributing factor the value of a home. Number and size of bedrooms, bathrooms, and kitchens
- Appliances – The age of the appliances and fuel source can affect the value of a property.
- Interior conditions – Paint conditions, wall conditions, and floor conditions, are all taken into consideration by an appraiser.
How do you prepare for an appraisal?
You can take a few simple steps to prepare for your appraisal that may work out in your favor. If anything, some of these tips will simply help the appraiser get his job done more effectively.
- Deep clean your home
- Secure your pets
- Clean up the yard
- Touch up interior and exterior paint
What if you’re not happy with the appraisal results?
A low appraisal can occur in a competitive market when multiple offers push the price above asking or even above FMV (fair market value). Another possibility is that the initial CMA (comparative market analysis) completed on your home skewed high, and the appraisal has suggested a more accurate valuation for the property.
If this happens, you’ll be glad you have a team of experienced professionals backing you up. A low appraisal doesn’t have to be a deal-killer, but you’ll need savvy advice and a cool head to move forward successfully in this scenario.
Now you have an idea of how the appraisal can come in lower than expected. Armed with this knowledge, let’s talk about what to do if this scenario occurs during your transaction:
Reduce the Contract Price
Possibly the simplest response to this situation is for you, the seller, to reduce the price to meet the appraisal. Depending on how motivated you are to sell and what your ideal time frame is, this is a valid response. It is disappointing to settle for less than you thought you were getting for your property, but on the other hand, there is something to be said for the bird (or in this case the contract) you already have in hand.
The reality of mortgage lending is that the lender will not be willing to loan more money to the buyer than the value of the property. Something’s gotta give. For the sake of simple math, let’s say your property is under contract for $410,000, but the appraisal comes in at $400k. You have a $10,000 shortfall on your hands. You can ask the buyer to bring cash to the table to make up the difference (and in a competitive market like Denver or Seattle that has enjoyed for the last many months, this may be a viable option), or you could offer to meet the buyer in the middle – lowering the price by $5k and asking the buyer to provide an additional $5k in order to close the deal.
Put the home back on the market
Every sale is unique, but we’re going to caution you this may not be the best way to combat a low appraisal. You can certainly hedge your bets – especially in a seller’s market – that the next buyer will have the funds to cover any difference between the list price and the appraisal value.
But – and this is important – you should be prepared to be in the exact same situation when the appraisal once again comes in below the contract price. And, this time, your house isn’t the hot new listing it once was. If your property languishes on the market, you’ll end up selling for less than the original contract offered, anyway. It may be in your best interest to make your contract stick, even if it requires a compromise on your part to do so.
Challenge the low appraisal
You can challenge the appraisal with the lender or request a second appraisal of the property. If you choose this route it is important to understand that as the seller, you do not hold the cards in terms of challenging the appraisal or ordering a second appraisal on the property. Whether or not this takes place is entirely up to the lender, and a request of this nature can come from the buyer – but not from you.
Speak openly and honestly about your goals and willingness to press the issue of the appraisal with your agent. Your agent should be able to negotiate this situation on your behalf. Take some time and review the CMA with your agent. You may come to a clear agreement with the buyer about challenging the appraisal and still fail at the attempt if the lender does not agree to review or redo the appraisal, and since they are likely working with an experienced appraiser they know and trust, the likelihood that they will turn down this request is pretty high.