Applying for a mortgage? Keep your stress ball handy.
Aside from collecting your income and asset documentation and pulling your credit report — and a dozen other data points — lenders also require an appraisal of the property you want to buy or refinance. At your expense, of course.
The better you understand the process, the less likely you are to get thrown off by a nasty surprise.
What Is a Home Appraisal?
Home appraisers inspect the property and research the neighborhood to determine the home’s market value. They then write up a home appraisal report and submit it to their client: usually the lender, but you can hire an appraiser yourself for other needs as well.
Because homes are worth whatever a buyer is willing to pay for them, think of appraised values as estimates. The real world is a messy place, after all.
What Appraisers Look For
Real estate appraisers use one of three approaches to determine a property’s fair market value.
The most common of these, used almost exclusively among residential homes, is the comparable sales approach. The appraiser looks at what similar homes nearby have sold for recently to determine the likely value of your home.
A perfect comparable sale or “comp” would be an identical home in the same condition, located right next door, and that sold yesterday. As you can imagine, that almost never happens.
So appraisers find the best comps they can, balancing proximity, recency, and similarity. A property that sold on the same block offers a better comp than one six streets over. Likewise, a house with similar square footage, architectural style, and land area offers a better comp than vastly different houses.
The appraiser considers factors including:
- The number of bedrooms, bathrooms, and rooms
- The condition of the home
- The size of the home
- The size of the property lot
- The quality of landscaping
- The quality of light and views
- Amenities such as fireplaces or hot tubs
- The quality of the basement (whether it’s finished or unfinished)
- The finishing details in the home (such as stone countertops, hardwood floors, and lighting fixtures)
Appraisers compare all of these factors against other recently sold homes. If your house needs updates and repairs, they adjust the estimated value accordingly.
For income properties, such as multifamily apartment buildings, appraisers sometimes use the income approach to calculate a property’s valuation based on its revenue potential, rather than the sales comparison approach. Or appraisers could theoretically use the cost approach, calculating the replacement cost of building a new home. But appraisers almost never use these approaches for standard residential homes.
What an Appraisal Report Tells You
The appraisal report lists the estimated value of a home, but just as importantly, it provides the reasoning and evidence for how the appraiser reached that valuation.
Appraisals detail the size, style, layout, location, amenities, age, and condition of a property. They also include photographs of the interior and exterior, along with rough floor plans.
The report goes on to showcase the comparable property sales nearby that the appraiser used to determine the home’s value. Appraisers include photos of these, along with a summary of how well they match your home. Critically, they also list the sale date for each — the more recent, the better they reflect the current market value.
For government mortgages such as FHA loans and VA loans, appraisers must also include certain red flag features such as peeling paint or stairwells missing handrails.
The Home Appraisal Process
Appraisers visit the property and photograph the interior, exterior, and any land the building sits on. They map out the floor plan along with approximated measurements of each room’s size and the property’s square footage.
While walking through the property, they inspect its condition. Are there any structural issues? How recent are the finishes and appliances, particularly in the kitchen and bathrooms? How modern are the mechanical systems? Does the property need any repairs?
Don’t confuse an appraiser’s walk-through with a home inspection however. While an appraiser may spend 20 to 30 minutes walking through a property, home inspectors spend hours, peering under the surface to determine the exact condition of every structure and system.
Appraisers then return to their office and pull up the property’s public records, including the official square footage, land area, assessed value, and sales history. Then comes the research into the neighborhood and its recent sales, to start working out exactly how your property compares.
Finally, the appraiser writes up a formal appraisal report to deliver to you and your mortgage lender.
Home Appraisal Tips
Although you can’t influence an appraiser’s opinion of your home’s value, that doesn’t mean you should do nothing. Keep the following tips in mind as you navigate the appraisal process.
If You’re Selling a Home
The higher the appraised value, the better for you as a seller. You certainly don’t want your sales contract to fall through because the home didn’t appraise above the purchase price.
Toward that end, clean the property inside and out before the appraiser arrives. Mow the lawn if necessary, and clean up the landscaping as best you can.
Pick up the clutter around the house, sweep and mop the floors, clean the bathrooms. In particular, make sure the appraiser can access every closet and room in the house, including storage areas like the basement and attic. If there’s too much clutter, they might not be able to see the full size and condition of these areas.
Ideally repaint any areas that need it. Not only does it make a far better impression for the property’s condition, but remember that appraisers sometimes need to note chipping or peeling paint in their appraisal report for lenders.
If you know any inside information about your home’s condition versus recent nearby sales, share it with the appraiser. For example: “We installed all new wiring and copper plumbing three years ago, while the house across the street hasn’t been updated for 20 years.”
In other words, make your best case for the home’s value, while understanding that the appraiser has been around the block and knows what you’re doing.
If You’re Buying a Home
Oddly enough, you and the seller share the same goal: ensuring the property appraisers above the purchase price. If it doesn’t, the lender won’t approve your loan — or rather, they’ll base the loan percentage (LTV) on the appraised value, not the sale price.
Although you want your purchase and loan to go through, you should pay attention to the appraiser’s comments and notes. Having worked as a loan officer and a real estate investor, I’ve worked with many appraisers, and they generally aim to please by appraising the property at or above the contract price. But only to the extent that the price is plausible: if an appraiser returns an estimated value below the contract price, it means they truly believe the home isn’t worth it.
As the person potentially overpaying, you should not only take their assessment seriously, but you should thank them.
Also watch out for the phrase “Buyer to verify all permits.” It means the appraiser finds some repairs or renovation work suspect, and recommends that you confirm the seller got proper permits for the work.
If the appraised value comes back below the purchase price, you have three options. You can walk away from the deal of course, but before you do that, try renegotiating the price with the seller. They may come down and you can proceed with the purchase.
Alternatively, you can come up with a higher down payment on the house. Lenders base their loan on the lower of either the purchase price or the appraised value. So if you had a home under contract for $200,000, with a 90% LTV loan, and the home appraises for $190,000, the lender would offer you a home loan of $171,000 rather than $180,000. You could come up with the extra $9,000 yourself to continue with the deal.
If You’re Refinancing a Home
As a homeowner refinancing, you should take the same steps as a seller before the appraiser arrives. Clean out the clutter, spruce up the lawn and landscaping, scrub the house. Aim for a strong first impression by boosting the curb appeal.
If you have the time, repaint rooms with scuffs on the walls, or areas with peeling paint. You can even whip out a can of wood polish or wax and do your best Mr. Miyagi impression with the hardwood floors.
Home Appraisal FAQs
You aren’t alone in your questions about the home appraisal process. Here are a few of the most common.
How Much Does a Home Appraisal Cost?
As a general rule, home appraisals fall in the $300 to $500 range. But they may cost more for larger, more unique, or higher-end homes.
Ask for a price quote from the appraiser upfront, while bearing in mind that you probably don’t have any choice in the matter. Your lender typically hires the appraiser, as someone they know and trust.
Who Pays for an Appraisal?
The borrower pays for the appraisal fee, even though the lender is usually the appraiser’s client. It marks one more closing cost you have to pay out of pocket for when you buy a home.
Unfortunately for you, you can’t deduct these fees on your tax return either. However you can add it as an expense when calculating your capital gains when it comes time to sell.
How Long Does the Home Appraisal Process Take?
In general, it usually takes appraisers between one and two weeks to deliver an appraisal report, once ordered. You can offer to pay more for an expedited appraisal if the sale is urgent.
Make sure you communicate any deadlines and urgency to the appraiser upfront so they understand your time frame.
What’s the Difference Between a Home Appraisal and a Home Inspection?
Appraisals report an estimated market value for a property. Home inspections report on the property’s condition in exacting detail.
For example, the appraiser will check the approximate age and condition of the furnace, but may not look inside it. A good home inspector looks behind every access panel, spending hours trying to find the exact condition of every component in the house.
Also note that while appraisers ultimately work for the lender, home inspectors work for the buyer. Lenders hire appraisers to verify the property value, buyers hire home inspectors to verify the property’s condition.
What’s the Next Step After an Appraisal?
Check in every few days with your mortgage loan officer about the loan’s status.
Loans go through processing and underwriting before they can close, and the underwriter needs to review the appraisal report. The process involves plenty of red tape, and lenders often miss deadlines. It’s up to you as the borrower to stay on top of them and demand that your loan close on time.
Final Word
To protect yourself against the subjectivity of the appraisal process, you do hold one card in your hand: your real estate agent.
If you worked with an agent throughout the offer and negotiation process, you can be sure they want to earn a commission. Request that they compile an independent list of comps to submit to the appraiser highlighting favorable similarities to your prospective home.
The appraisal process is subjective, so push your own agenda where you can.
