Appraisal Process: The 4 Steps Used to Determine How Much Your Property is Worth

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Wonder how home appraisals work? If you’re getting a loan to purchase a home, you’ll be going through the real estate appraisal process. A home appraisal is a report ordered by the lender through whom you will be getting your loan. It tells them exactly how much the property is worth in its current condition.

A home appraisal is not to be confused with a home inspection. Home inspections are performed by a different professional and provide a report about the condition of the major systems of the home.

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Appraisal Process: Why is it Necessary?

The home appraisal is necessary because the lender wants to know what the property is worth. They don’t want to be stuck holding the bag on a property worth far less than the loan they extended on it.

The appraiser who performs the appraisal views the property and decides on the final value of the home. This is in large part by comparing the subject property to similar properties that have sold recently in the immediate vicinity.

So how does the appraisal process work? Let’s look at the appraisal process in four easy steps.

appraisal-process

How Home Appraisals Work

1. Bank Order

The lending institution through which you are getting your loan will initiate a request for real estate appraisal. The passage of the Dodd-Frank Act has changed the way home appraisals are ordered. The lender has little or no contact with the appraiser until after the work has been performed, so there is no “undue influence” on the appraiser to value the home at a certain price.

Lenders are no longer allowed to choose a specific appraiser. Still, you can (and should) request a local appraiser who is familiar with the market conditions in the area.

The cost of the home appraisal is traditionally the buyer’s responsibility. It is typically paid at closing as part of the closing costs.

2. Inspection of Property

The appraiser will contact the seller’s agent to set up a time for the appraisal process to happen. This is a great time to double-check that the appraiser is local.

During the property inspection, the appraiser walks through the entire home, assessing the condition of the property and noting any upgrades like high-end countertops or appliances. They also note the general condition of the neighborhood.

Related: How to Calculate the Value of Multifamily Real Estate

3. Comparable Properties

Once the appraiser has finished inspecting the home, they pull recent sales information from the MLS or public records. They then compare those homes to the subject property to see how it stacks up against the competition.

This is most easily done in a more recently built subdivision where there are only a few different house styles to choose from. An exact or almost-exact copy of the subject property that has sold in the last 30-90 days is the best way to determine what the home is worth.

But not every home has an exact duplicate to pull from. When this happens, the appraiser must take into account other factors, such as the ever-popular location, location, location.

Other determining factors in the home appraisal:

  • Lot Size
  • Lot Location
  • Landscaping/Curb Appeal
  • Interior Finishes
  • Proximity to Services and Parks

The appraiser compares the subject home to other homes recently sold, but since those homes are no longer on the market, the appraiser can’t go see them. Since they aren’t able to walk through the home in person, they rely on images from the MLS. If you know something about a nearby home that you feel affected the sales price, share that with the appraiser in a written letter.

On my own street, several homes have recently sold. One sold for considerably less because the interior had not been updated since the late 1980s. The MLS pictures didn’t show the interior at all. The exterior was gorgeous.

Another home sold for less-than-market because the previous owner had died inside and was not found for 12 days, a fact also not mentioned in the MLS.

A third property, simply listed “sold as-is” required $35,000 in sewer work and went for a steep discount as well.

If you know something that you feel affected the selling price of a home near you, make sure you share that with the appraiser.

FHA Home Inspection Checklist

Related: 3 Upgrades That Add Little to No Value to Your Investment Property

4. Final Appraisal Report

Once the appraiser has inspected the home and compared it to recently sold properties, they will write up a report, giving their estimate of the value of the home. The report will include which specific addresses they used as comparable properties to value the home, along with a description of the actual subject property, a map marking the location of the home, a picture of the property, and a general condition of the current real estate market.

What Can You Do If the Home Appraisal Comes in Low?

If after the appraisal process your appraisal comes in lower than you expected, read the report thoroughly to be sure there aren’t any errors like wrong number of bedrooms/bathrooms or incorrect square footage.

Also double check the comparable properties to make sure they truly are comparable to yours. Appraisers are human and make mistakes, too.

However, if you cannot find any glaring errors in the home appraisal report, you may wish to appeal your appraisal or even pay for a new one.

Any questions about the home appraisal process? Any advice you’d add?

Don’t forget to leave a comment below.

About Author

Mindy Jensen

Mindy has flipped numerous homes in the past 10 years, one at a time and doing much of the work with her husband. She lives in Longmont, CO, and is always looking for an ugly duckling to turn into a swan.

21 Comments

  1. Curt Smith

    Tnx Mindy, We’ve all been screwed by an appraisal I’m sure. My personal home REFI appraisal came in low for a few reasons like one comp was a 2 bed, ours is 3, another comp was a single garage ours is 2. The finished 3rd bath and bedroom in the basement was not even mentioned…

    Just do your own CMA/BPO before hand and lay the pages out on the counter where he/she can’t miss it. IE an ounce of prevention is worth more than a pound of cure once you have a bad appraisal.

    There’s a few dirty secrets in the appraisal business. For purchase money and the contract price is $200k on a remodeled house, yet recent sales of lesser remodels in the area are $180k, poof 9 times out of 10 the appraisal will come in at $200k. This is how comps get pushed!

    The problem area is cash out REFIs you are almost gauranteed to get a low appraisal because the deal won’t be killed by a low appraisal, where purchase money everyone screems at the appraiser.

    Yes yes I know I’m speaking craziness suggesting appraisals aren’t science that there’s politics and logistics of killing deals or not involved!! LOL Your mileage may vary applies in this topic IMHO.

    • Nathan Richmond

      Curt, you are dead on. It’s amazing how the number the appraiser comes up with is just the number needed when making a new purchase. I just bought a duplex recently and magically the number came back right at what our agreed price was.

      I definitely agree with what this article says. It’s a great idea to have not only differences listed between your property and possible comparisons, but also to have a list (and pictures) of upgrades you’ve made since your property was last appraised. I’m having new landscaping put in, in the front, and I’m remodeling. Pictures will be provided to the appraiser once it is time to refinance.

    • I am a Certified HUD appraiser, 27 years, and expert witness for one of the top 10 trial attorneys in the US, Bobby Lee Cook. It doesn’t work that way. Appraisers don’t low-ball for “just no reason”. Unless they are incompetent. In that case call your State Real Estate Commission and file a complaint.

  2. Karen O.

    Thx for this. You nailed it. I’m getting a mortgage on a property I, and this is exactly how it happened. I was conservative in my own estimate. So was pleasantly surprised when appraisal was more than expected. I didn’t change my loan request based on it, but took solace in knowing I have more equity then I thought. Which isn’t a bad thing.

  3. Kelli huang

    Thank you for this post. It’s helpful since I just had my house appraised for the first time yesterday! It is for a cash out refi so I am anxious since the appraisal will determine how much down payment I will have to purchase my next property. The appraiser was very nice and didn’t mind the small talk. Hopefully I get what I hope for.

    • Mindy Jensen

      Thanks for sharing this link, Al.

      J. Scott is normally 100% correct, and when he wrote this (the thread is more than 6 years old) these suggestions were great.

      The appraisal process has changed considerably. You can no longer choose your appraiser, so some of this advice is no longer accurate. The other parts of J’s advice is still solid.

  4. Scott M.

    Question: I have found appraisers have a hard time really giving accurate values of higher end homes, as it comes to valuing quality of build. 2 homes can sit on the same street and have same approx sq footage, but can be drastically different in real quality and replacement cost. When it comes to higher end construction, just using the comps of sq footage and price seems very lacking and not a fair assessment. What would you recommend in these situations to get a fair and accurate appraisal?

    • Mindy Jensen

      Hi Scott. Thanks for reading.

      This scenario is the perfect time to provide a “cheat sheet” for your appraiser. In your cheat sheet, you would name the builder, and the reasons you have for your builder to be considered a higher-quality builder than the home down the street that was built by someone else. It may not be readily apparent to the appraiser that the homes were built by different companies, and the appraiser won’t be going inside the other home to compare it to yours.

      Any information you have about the homes or the neighborhood, you should include. In fact, anything you feel could give the appraiser the most information about your home should be included.

      In most neighborhoods, the builder of one home also built all the rest of the homes. It is easy to see how they would assume the same for your neighborhood too.

  5. Jennifer Gomez

    Hi Mindy. This is so helpful. I have a couple of questions.

    I’m renting a home and the owner is facing a huge balloon payment on a refi, so she wants to sell. She’s eager for me to buy since I’m already here, and there would be some significant advantages for me if I could make it work. But, to come up with her asking price she gave me a list of comps which are, frankly, ridiculous. They include vastly more valuable properties (6x more acreage, waterfront w/boat lift and dock, much bigger, fully updated kitchen, etc. – when this house has none of those). Furthermore, some are current listings. I may be inexperienced, but comps are based on properties which have sold, right? We had discussed the savings for me if she didn’t need to use a realtor, and at ~6% that’d be over $23k.
    1. Can I negotiate my idea of realistic comps without using a realtor?

    Also, after reviewing her comps, my idea of more appropriate comps, and numerous other sales in our area, I’m noticing that most are not selling for much over the tax assessment. It’s a pretty clear pattern.
    2. Can you give me a brief explanation of the difference between an appraisal and a tax assessment? And have you any wisdom to share on this?

    Thanks a bunch!

    • Curt Smith

      Hi Jennifer, Find an agent with a sign on a property near yours. Offer to pay for a CMA/BPO for actual value. Offer $100. She may do it for free since she may like you and your story. She’s licensed and a professional so the comps and price will be in line.

      If it where ME I’d take the CMA and take off 10% since the seller would loose 6% to the agents and every seller today has to pay closing costs of 3% typically. LOL See I just got you a great price on a house you are already living in.

      You have time as your advantage. Take the CMA/BPO and subtract 10% give your written (must be in writing) to the seller. And just wait. You have nothing to loose and everything to gain by being smart and patient.

      • Curt Smith

        Jennifer you didn’;t say if you qualify for bank financing? Since the seller MUST find a buyer who can cash out the underlying note you have to be bankable? This means savings for 5% down, good income, low debt. FHA is a tougher loan for the seller since again the appraiser is asked to low ball the appraisal since in FHA the 5% equity the note must have is taken out of the sellers hide. The above “professional” appraisers bleeting that this never happens aside, it does!

        Get approved by a bank and get a written pre approved letter for > than the offer price. So if you offered to buy with conventional financing, attached a $500 earnest money check, the pre approval letter to your low ball offer the seller will have to take your offer seriously.

    • Mindy Jensen

      HI Jennifer.

      I’ll try to help. I’m assuming you are getting a loan to purchase this home? The lender will order an appraisal, and will not give you a loan for more than the home is worth. I like Kurt’s suggestion below to find an agent and offer them a nominal fee for a BPO or Broker’s Price Opinion.

      Of course she wants the most for her place, but that doesn’t mean you have to pay her what she wants. Since you are new to this, I would hire an attorney who can write up the contract and explain it all to you. There is a lot more involved in a real estate contract than you might think.

      An appraisal is what the home is worth on the current market. It takes into consideration recently sold homes. The tax assessment is the value that the city or county puts on the property. I have routinely seen tax assessments lower than appraised values – sometimes significantly lower.

      You can negotiate anything with the seller. The time to do this is BEFORE you both sign the contract. I get that you both want to save money by not using an agent, but the legalese on the contract is difficult to understand. And just for kicks, the legal definition of some words is different than the regular, popular definition, so you may think you’re saying one thing, but legally you’re saying another. A good attorney will run around $500-$750 depending on your state, but having someone to answer your questions and help you through this is a good idea.

      Good luck!

  6. You mentioned that the home appraisal is necessary because the lender wants to know what the property is worth. Is an appraisal needed for any property that is to be sold? My brother wants to move to a lakefront property but is having issues selling his home. Hiring a professional to appraise his home might be a good option.

    • Curt Smith

      Derek, Have your brother think through offering financing. This will capture A LOT of traffic. Even if he has a mortgage, do a “wrap loan” for his equity less the down payment. Get the appraisal. Then put ads in craisgslist and postlets.com for sale by owner: Owner will finance – very nice home – $10k down – I’ll finance the rest. Any real estate attorney or title office can write a wrap note and mortgage. This is simple. Dodd Frank is not in play by much if its an owner selling their own home and its their first note to an occupant. You can PM me for more details.

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