What are home appraisals?
A residential appraisal is an unbiased opinion of the market value at a specific point in time, meaning what is the most probable price a willing buyer would pay for a specific property. The opinion is based on analysis of factual data. Appraisal happens after an initial offer is accepted and is one of the first steps towards closing the sale of a home.
As a later phase of your mortgage approval, appraisal can be a nerve-wracking moment for both buyers and sellers. After working towards their real estate goals for years, awaiting final approval from an impartial third party can be stressful.
Usually, the appraiser would base the estimated value of a home on in-depth research taking factors such as site-inspections, amenity/features, condition, quality and sales of similar properties into consideration.
What do home appraisers look for?
Once the decision has been made to move forward and an offer is accepted, the lender will schedule an appraisal on the home.
Lenders will always seek an impartial appraisal before they can issue a mortgage. This is done to ensure an accurate market value estimate of the property and to protect the consumer. In the event of foreclosure, these lenders will repossess the property and sell it back on the market to make back their initial investment of the loan.
An appraisal ensures that the lending organization will be able to recoup their investment should the borrower be unable to repay the loan. By initially investing an appropriate amount, mortgage lenders can rest assured that their money will be made back.
An appraiser’s report is based on multiple factors, such as visual inspection, sales of nearby similar properties and additional home features.
Indoor elements such as square footage, quality of construction, recent upgrades, number of bedrooms and bathrooms also may contribute to a home appraisal report.
These reports involve a thorough review of the property's overall quality, condition, and amenities/features to determine whether the listed price for the home is appropriate. If the appraised value comes back less than the listed price, the sale can be renegotiated or cancelled altogether.
What are appraisal fees?
The cost of an appraisal is covered by the buyer and is usually a few hundred dollars. These fees are typically included in closing, as the mortgage lender will order the appraisal.
The appraiser should not only be licensed/certified and qualified, but also familiar with the surrounding area. Lenders require a clear picture of the appraiser’s opinion of value as well as the property’s current condition. Market conditions and recent economic trends also factor heavily in these final estimates.
The appraisal industry is heavily regulated at the State and Federal levels. Appraisers are also required by law to be impartial, unbiased, compliant with Fair Housing Laws and free of any interest in the transaction’s outcome.
What if the appraisal is too low?
While uncommon, the appraised value can sometimes be less than the seller’s asking or contract price.
In this scenario, the buyer and mortgage lender may be able to negotiate a lower price to match the estimated value. A motivated seller may agree to an adjusted price or seek a second evaluation.
When the seller or buyer suspects inconsistencies with the original appraiser’s report, a fact-based case for amendment may be submitted to the original appraiser who may revise their initial evaluation in response. If the buyer or seller feel the appraiser’s response is deficient, they may request the lender review the response to consider allowing a second appraisal.
Based on the seller’s desire to renegotiate or seek a second opinion, a less than expected appraisal will likely delay closing. At this point, buyers and lenders will be less willing to move forward with an offer due to frustration over delays.
What hurts a home appraisal?
A lower than expected appraisal means the home’s price may need to come down to secure a sale; see the previous section. Buyers and their lenders will not be willing to make an agreement based on an inflated price and may back out of a sale if an original price turns out to be inaccurate.
Market considerations that are out of a homeowner’s control, such as recent sales or foreclosures of nearby homes, can drive down a property’s value. Sellers can augment this downturn by demonstrating to the appraiser that the property is in better condition or has additional features, unlike the surrounding homes.
Appraisal is an essential step in the mortgage process as it ensures the amount being paid by the borrower and lender is true to the value of the home. Understanding what appraisers look for and the fees associated with the process benefit both the buyer and seller by getting the most out of the real estate transaction.
While appraisal fees are settled at closing of the sale, they are not the only closing cost that must be paid at this stage. Insurance premiums, taxes and other fees will all factor into a home’s closing costs.