What is a Home Appraisal and Other Frequently Asked Questions 

 November 1, 2020

By Scott Teesdale  

minutes read time

A home appraisal is the estimated value of a house, conducted by a licensed professional, considering various aspects like the house’s condition, size, location, number of floors, floor planning, etc. This estimate should be completely unbiased where the appraiser gives an honest, objective, and accurate evaluation of the house to determine its monetary worth. It requires a careful visual inspection from top to bottom, current information related to housing in the surrounding area, along with background information on the house like any renovations, updates, materials used, etc.

Home appraisals protect both the lender and the buyer. It protects the lender because it helps them take certain precautions to ensure that their investment is safe and won’t face any loss in a worst-case scenario. It protects the buyer by ensuring that s/he does not pay more for a house or a property than it’s actual worth.

Appraisals are a requirement when taking out a mortgage and are usually conducted by the lender. They are also done in simple purchase and sale transactions by independent buyers to compare the appraised or estimated value with the contract price. They are useful for the lender, buyer, and seller in the following ways.

  • Lender (bank). Appraisals are a way to ensure that they do not provide the buyer with more money than what is required to purchase the home. It is also an efficient way of protecting their investment—the home serves as collateral for their investment. If the buyer fails to meet their loan obligations, the lender will sell the house to cover the debt amount. If there is no appraisal or inaccurate appraisal, the lender could accidentally lend out more money to the borrower and face a significant loss on the resale.
  • Buyer. The valuation process gives the buyer assurance they are paying a fair price for what the property is worth, not falling into a scam or being tricked into overpaying for a property that might be valued at much less than its list price. If the appraised value is lower than what the buyer has been offered to pay, they can re-open negotiations, bring forth a new proposal, or simply walk away from the deal altogether.
  • Seller (owner). The seller also conducts an appraisal to estimate how much they should price their house for. Since a professional appraisal comes with a full report that describes the home’s condition and lists what factors have increased or decreased the home value, sellers use this report to learn what they can do to increase their home appraisal value.

It’s apparent from this that it doesn’t matter which of the three groups you belong to; for a smooth and peaceful transaction that leaves everyone satisfied, it is essential to get an appraisal.

Frequently asked questions regarding home appraisals

Now that we’ve covered the basics of why a home buyer should get an appraisal, here are some frequently asked questions.

When does the appraisal occur during the home buying process?

  • Lender: once the buyer’s bid gets accepted but before the lender creates the mortgage.
  • Buyer: after they bid but before the deal closes. For this reason, there’s a ‘home appraisal contingency’ section in their contract with the seller, which entails that they can back out from a deal if the appraisal is too low. This protects their interests and can re-open negotiations with the seller for a new selling price from which all parties benefit.
  • Seller: before sellers list their property on the market to help them determine the listing price, otherwise seven days after the seller accepts an offer from the buyer (i.e., after all the financial details have been decided).

How much does it cost to get an appraisal?

Typically, home appraisals for single families cost between an average range of $300-$450. However, these costs can vary depending on the size, condition, location, functional area, unique structures, age, and the current real estate market. If the house is unique with no other comparable homes in the area or a region with higher labor costs, the appraisal would be more expensive and could even shoot up between $500-$800 dollars. Multi-Family homes are more complex, and their appraisal cost can be anywhere from $600-$1500.

Who does the appraisal, and where can we find them?

Appraisals are conducted by highly trained professionals licensed to do this particular work and are not a general assessment that anyone can simply make. The people who perform appraisals are called ‘certified appraisers,’ and you can find one at American Society of Appraisers, or you could head to the National Association of Realtors and get in touch with someone of your choice. Licensed appraisers require 150 hours of state-regulated education along with 1000 hours of fieldwork before receiving their license.

Who pays for the appraisal?

While appraisals are usually arranged for by the lender, the buyer generally pays for them. The lender chooses someone who would be completely unbiased, fair, and objective not to favor any party. To enforce this principle, lenders are prohibited from having any personal relationship with the appraisers.

What if the appraisal is too low?

A lower-than-expected appraisal value affects each party differently.

  • For the lender (bank). A low appraisal likely means the lender will back out from providing the loan to the buyer. The lender is looking for a healthy, fair, and compatible ‘loan to value’ ratio. They want to ensure their investment is protected, just in case the buyer stops making payments and foreclosure occurs.
  • For the buyer. A low appraisal value usually means the buyer is spending more money on a property that’s simply not worth it. The buyer can opt-out of the deal entirely and choose to move onto a different seller or house contract.
  • For the seller/homeowner. A low appraisal can also be harmful to the seller, especially if they maintain that the house should be valued at a higher price. When this happens, it’s better to get a second opinion and compare the two values. If the appraisal is still low, the homeowner can start looking into significant factors that affect the appraisal value and rectify them. This can include some simple upgrades, or fixing some basic things like a leaky ceiling or roof, repairing broken doors, windows, etc.

A low appraisal value could occur for a few reasons:

  • Low market values
  • Inexperienced appraiser (i.e., someone who doesn’t take into account local deals and looks over recent changes)
  • An abundance of foreclosed homes in the area (which would sell for cheaper)
  • Overpricing by the seller

When trying to increase the value of your home appraisal, look for easy wins that require little financial investment but could potentially boost the value of your home’s price.

How do appraisal and inspection differ?

While many people think that home appraisals and home inspections are similar, but that is not the case. The primary purpose of each is:

  • An appraisal is conducted to estimate the property’s total value in a real estate market, based on extensive research on recent selling costs of similar homes in the region and the size, design, and condition of the house itself.
  • A home inspection looks at the home’s condition and determines the potential cost of repair for any damages. A home inspection only considers the physical condition of the house itself, including the integrity and quality of its materials. The quality of the HVAC, electrical, plumbing systems, any in-built appliances, any old damage that needs fixing, or broken parts in the home like windows are checked, and the total cost of repair for everything is provided in the report. A home inspection is not concerned with market values, current buying/selling trends, or the home’s square footage.

Another key difference is that while the lender arranges the home appraisal for determining a suitable mortgage loan, the home inspection is conducted by the buyer to educate and inform themselves of what they’re getting into and how much they need to fix any damage. Both are paid for by the buyer.

Bank appraised value vs. fair market value

Fair market values (FMV) are driven by the market (i.e., the buyers), whereas the appraisal values are determined by professionals licensed to give valuation estimates on properties.

Since FMVs are consumer-driven, they are set by the buyer’s willingness to pay for a house. The value represents the buyer’s attitude at the time, and if buyers are few and far between, the market value will fall. You can estimate your home’s market value on Zillow.

On the other hand, home appraisals are what the bank will use to determine how much of a loan to give the buyer, based on several factors. Unlike FMV estimates, the appraisals do not consider buyer demand when assessing the value of a home—instead, the appraiser will consider the recent sale prices of property in the neighborhood as one of their factors. Furthermore, appraisers require visual inspection of the home or site visitation to determine their value.

Lastly, the end selling price will lie somewhere between the market value (which determines the assets worth at a specific time based on consumers) and the appraised value.

Importance of getting an appraisal

If you’re a buyer, you’re looking for something excellent but economical, something financially viable but also meets specific minimum requirements, especially if you have a family. Getting an appraisal can help ensure that you don’t pay for more than a property’s worth and get a great deal.

If you’re a seller, you can’t afford to sell your house on a loss, especially if you spent top dollar maintaining it and making it the best possible. Appraisals can give you a rough cost on the minimum rate you should set for your house and provide you with a maximum selling price so you can establish the middle ground yourself and get in touch with suitable clients.

A lender, whose entire business revolves around loaning money and getting a profit, cannot afford to invest money in the wrong or risky project that might not make for any returns. An appraisal is essential for them to match it with the offered or contract price and make the final investment decision.

Summing Up

A home appraisal positively contributes to the contract on the house. It is beneficial for everyone involved, ensuring that everyone is clear on what they’re signing up for, and no one has any reservations regarding the deal. It makes the entire house buying process more transparent and smooth as well as prevents many problems that may occur in the future like undisclosed information or a disagreement on the home’s condition.

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.