The home appraisal process can be one of the most nerve-wracking parts of a home sale. A single independent party is assessing the fair market value of your home, and the appraiser's conclusion can sink the deal. Banks will not approve the loan if the appraisal does not give them sufficient collateral.
The primary factors in a home appraisal are the current market trends relating to the location and type of house, the recent sales figures from comparable homes in the area — and, of course, the condition of the home. Appraisers will look for factors in several areas to assess the condition.
- Exterior – Appraisers will assess the structural basics of the home and the size and condition of the surrounding property. Checks include the integrity of the foundation and roof, any issues with siding, guttering or soffits, and evidence of leaks, cracks or water damage. Expansion capabilities with the property, or any potential issues such as flood-prone spots or dead trees may be taken into account.
- Interior – The layout of the home, total square footage, number of bedrooms and bathrooms, appliances, and the materials and condition of all interior surfaces will be evaluated. Any non-functional appliances, lighting, electrical outlets or plumbing fixtures detract from the appraisal value. If modifications have been made, the structural integrity of the walls and load-bearing beams will be evaluated.
- Extras – Features that add to the value such as a pool or improvements that have been made since the last appraisal will be incorporated in the value.
The final appraisal report includes the basic information used by the appraiser and explanations of the valuation results.
Appraisal costs, usually $300-$400, are typically paid for by the buyer. However, a seller can also ask for their own appraisal, especially if they disagree with the initial appraisal value.
Appraisers must be certified/licensed and should have familiarity with the area and the local real estate market. They must also have no conflict of interest in the transaction toward any party — lender, seller, or buyer.
However, relatively new rules prohibit Fannie Mae and Freddie Mac lenders from any direct contact with appraisers and there is a rise of third-party appraisal management companies (AMCs) to bridge the gap. AMCs are free to hire cheaper, potentially less-qualified appraisers, so review your appraisal information carefully.
Your reaction to an appraisal depends on what side of the transaction you are on.
- Sellers – A low appraisal may allow a buyer to back out if the contract was contingent on appraisal values, while a high appraisal value means you are agreeing to sell the house for more than it is worth. If the deal is threatened by the low appraisal, you can challenge the appraisal with the lender based on information that refutes the appraiser's conclusion, or get an appraisal of your own — although that runs the risk of confirming the low appraisal, and the value may not be accepted by the lender.
Dig into the reason for the low appraisal. If the comparable homes are not representative — and they may not be in a slow real estate market with few nearby options — you will have to look for your own that counter the ones that were used.
Meanwhile, to keep the appraisal costs as high as possible, sellers should take care of simple maintenance and maintain cleanliness and order in the home. The appraisal process is still subjective, and an appraiser cannot help his or her first impression of the home.
- Buyers – Many buyers are turned off by a low appraisal and back out even If they believe the appraisal was in error. Even if you are not really overpaying, that low appraisal remains on the record.
Other buyers will attempt to use the low appraisal as a negotiating tool to convince the seller to lower their asking price. Should that fail, your options are to make up the appraisal difference in cash at the time of purchase, or walk away from the deal. If both buyer and seller are willing to proceed and can handle the timeframe, it may be preferable to switch to a new lender and restart the process.
Whenever the appraisal value comes in high, celebrate. Assuming the seller honors the contract, that's a windfall for you of extra equity that you do not have to pay for.
- Refinancers – Since there is no buyer-seller relationship in a refinance, it's just a matter of whether the bank will approve your loan based on the appraisal value. Conventional loans are dependent on an appraisal that at least matches the amount you want to refinance, but the FHA streamline program does allow refinancing without an appraisal.
If there's reason to believe the value of your home has increased, you can help yourself with an appraisal in several ways. A higher appraisal may get you a better interest rate because it gives you a better loan-to-value (LTV) ratio, and it may also help you avoid private mortgage insurance (PMI). "There's a [mortgage insurance] price point when you're at 95% loan to value ratio that's fairly high, and between 90% and 95% is going to be the same cost, but as soon as you reach 90% loan to value ratio, then the insurance goes down," says Casey Fleming, Mortgage Advisor at C2 Financial Corporation and Author of The Loan Guide. "When you reach 85% loan to value ratio, the insurance goes down quite a bit more, and then when you reach 80%, the insurance disappears. So, the best way to keep your premiums low is to make sure that you've cleaned up any credit issues before you apply for the loan." You can do your own homework on comp houses and make your best guess on the valuation, but it is probably wiser to ask a real estate agent for an opinion before going forward with an appraisal.
Many deals hinge on an accurate appraisal, so make sure you agree with the appraisal terms regardless of which side of the transaction you are on.
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