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.
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.
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.
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?
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