Understanding Home Appraisals in Real Estate Transactions

The home appraisal is one of the more nail-biting parts of buying or selling a home. Many a deal has gone up in smoke due to the report. But a home appraisal should be no big deal if you’re prepared.

Considering how 78% of home buyers financed their purchase in 2023, home appraisals are a crucial part of the real estate transaction process. The report helps determine how much a mortgage lender will lend to a buyer. But that’s the only way home appraisals are used.

Here is what to know about the home appraisal, its impact on your real estate deal, and how these reports can be used.

What is a home appraisal?

A home appraisal is a crucial step in buying or selling a home. It is a detailed report specifying a property’s fair market value as determined by an expert, third-party, licensed appraiser. 

How appraisals are done

The appraiser, who is usually hired by the mortgage lender, assesses several key factors in determining the value of a home. These include but are not limited to:

• The size and condition of the living space
• The lot size and its features (location, views, ponds, beachfront, etc.)
• The values of comparable homes or recent sales in the same area
• Any upgrades or renovations that may have been done to the property

Based on these factors, the appraiser then provides an estimated value for the property. 

The sales comparison approach is the most common method of arriving at an estimated property value. This approach compares the home to similar properties that recently sold in the same immediate neighborhood or region. In the case of condos, it can be within the same building or complex.

What is considered a comparable property?

A comparable property, also known as a “comp,” is a recently sold home in the same area that is similar in size, age, and condition to the appraised property. When possible, these would be other properties within the subdivision, development, or designated neighborhood boundary. 

The appraiser uses these similar factors as a benchmark to determine the value of the subject property. They do their best to pull the most recent sales activity and homes within a tight radius of the appraised property. 

Other real estate appraisal tactics

Cost-approach appraisal is another common method used, especially for new single-family homes. This approach looks at the cost of building a similar home in the same location and adds or subtracts value based on any renovations or upgrades that differ from the subject property. 

For rental or investment properties, the income approach may be more applicable. It evaluates the property’s potential income based on location, features, and condition. The comps may include the rental rates of similar properties. 

Who does the appraisal process

As mentioned earlier, the appraiser is typically hired by the mortgage lender. However, it’s worth noting that they are not affiliated with either the buyer or seller and must remain unbiased in their property assessment.

Home appraising is a separate but related industry regulated differently in each state. Usually, it will have its own overseeing board, training, and licensing requirements, much like mortgage loan officers and real estate agents have different regulations and licensing requirements. 

Generally speaking, most qualified appraisers must undergo extensive training, often lasting about 1.5-2 years in a formal home appraisal program with scripted coursework. Next, they take a state licensing exam, which may be followed by an apprenticeship period before becoming certified independent appraisers. 

As you can see, a lot goes into becoming a certified home appraiser. The whole process can take 3-5 years, depending on the state.

What’s not included in a home appraisal

A home appraisal is not the same as a home inspection. 

A home physical inspection focuses on the property’s condition but doesn’t assign a financial value to the home. An appraisal may see items affecting the property, but it solely assesses its value in light of its current known condition. As such, an appraiser will not evaluate things like:

• The physical state of appliances or plumbing
• Pest infestations (unless it has caused structural damage that impacts home value)
• Movable structures like sheds or above-ground pools
• Children’s playgrounds and swing sets

Instead, they focus on the overall condition of the property and any significant or potential issues that may affect its value. So, while they may note cracking foundations or roofing damage, for them, it’s more about how those structural flaws negatively impact the home value against similar properties in good condition.

The home inspection report will better detail these flaws and their impact on the home’s livability. Learn more about what appraisal inspections will and won’t reveal.

How It Is Used

Both buyers and sellers use the home appraisal. Professional appraisals provide buyers with a realistic idea of what they should pay for the property. For sellers, it gives a more data-backed estimate of their home’s value as they set their asking price. 

Anyone financing their home purchase or refinancing their mortgage through a lender must have the home appraised. Lenders use the report to determine how much they will lend for the property based on its appraised value. Your home is their collateral should you stop making your mortgage payments, so they want to ensure their investment in the home is accurate in case they need to foreclose and recoup their investment. 

Mortgage lenders are required to give the buyer a copy of the residential appraisal report as soon as reasonably possible and no later than three days before your closing process. And even though the mortgage lender is ordering the home appraisal, the buyer pays for it as part of the closing costs.

But lenders aren’t the only ones who use home appraisals. Sometimes, homeowners order a home appraisal before listing the property to gauge a sales price better based on current real estate market conditions. This is more common with properties that have been extensively renovated or if the property has particularly unique features. A third-party review can help figure out how to list the property to sell.

Cash buyers may decide to order a home appraisal, but it’s not required. Their decision to seek a home appraisal may be because they plan to renovate the property and want to better gauge their budget and After Repair Value (ARV). Or it’s a matter of ensuring their cash offer is fair. In this scenario, the real estate transaction should not be contingent on a home appraisal–in other words, no re-negotiation of the purchase price after the report.

What happens when home appraisals go wrong

While most home appraisals go off without a hitch, there are times when they can affect the outcome of a real estate deal. For example:

• If the appraised value is higher than the sale price, it’s a win for the buyer. They now have more equity, and lending to them is less risk from the lender’s point of view (less of a loan-to-value ratio). 
• On the other hand, if it comes in lower than the sale price, it could lead to re-negotiating for both parties. For buyers, this means potentially having to come up with more cash for a down payment because their bank’s financing is for less money. Alternatively, sellers may need to reduce their asking price. If they don’t, the sellers risk losing their buyer if they can’t secure additional financing to cover the difference.
• In extreme cases where the appraisal is significantly lower than the sale price, the lender may decide not to fund the loan altogether. This situation is known as “lender pull out” and can be a deal-breaker for buyers and sellers.

What to do if you feel the home appraisal is wrong

Sometimes, the difference in value may not make sense in the buyer or seller’s eyes based on what they know about the home and the market. Professional appraisers are ordered to be objective, and most of them do their best to make informed, data-backed decisions. They know how much is at stake with these reports. 

But no process is perfect. If you feel the home appraisal is inaccurate, you can take steps to dispute it. However, this process may be lengthy and costly. Even more disappointingly, it ultimately may not change the appraised value.

The best course of action is to ensure that all necessary information has been provided to the real estate appraiser beforehand. This includes any upgrades or renovations done to the property, any comps you feel were overlooked, and any other relevant information that may impact the value.

Protesting the home appraisal report starts with requesting a re-valuation or filing a complaint with the lender. 

Additionally, you may consider ordering a second appraisal, known as a “field review.” In this case, an appraiser returns to the property to review in person again. This may be an added expense, but it may provide a more accurate assessment of the property’s value, especially if you present paperwork justifying a value adjustment. 

If you order a second appraisal, carefully review the first appraisal to find out what information the appraiser is missing. Have documentation that supports your case, such as new, updated comps, receipts for materials and labor, or new survey lines for the lot.

Should the lender not address your concerns, you can contact their regulator or the Consumer Financial Protection Bureau to escalate the process.

Frequently Asked Questions About What’s An Appraisal On A House

Can a loan be denied after appraisal?

The answer is yes. A loan can be denied after an appraisal. If the appraised home value is lower than the agreed-upon purchase price, the loan-to-value ratio is affected, transforming the property into a risk for the lender. If this happens, the lender may require the buyer to make a larger down payment. It is also possible that the loan gets denied altogether.

What can hurt an appraisal?

If you are a homebuyer or a seller, be aware of these factors that can hurt an appraisal value:

1. Outdated or poorly maintained systems, such as HVAC, plumbing, or electrical.
2. Structural issues like roof damage, foundation cracks, or water leaks are also major red flags.
3. The lack of curb appeal or poor condition. Houses with significant cosmetic damage may appraise lower as well.
4. Homes in areas with declining property values or those near features like busy roads, industrial zones, or high-crime areas may face lower appraisals.
5. Incomplete or unpermitted renovations can negatively affect the appraisal.

What increases appraisal value the most?

Factors that increase appraisal value the most include:

• Home improvements: Investing in kitchen or bathroom renovations often yields the highest returns.
• Enhancing curb appeal: This can be achieved through landscaping, repainting, or home exterior upgrades.
• Additions: Increasing the square footage or adding desirable features like a deck, pool, or energy-efficient upgrades can positively impact the appraisal.
• Location: Homes in well-maintained neighborhoods with rising property values also see higher appraisals.

What does an appraisal tell a buyer?

With an appraisal, the buyer gets an unbiased estimate of a home’s market value, which helps ensure they will not overpay for the property they are interested in. A well-performed, reliable appraisal is crucial for securing a mortgage, as lenders require the appraisal to determine the loan-to-value ratio and get a loan amount that aligns with the property’s worth.

How much does an appraisal cost?

The appraisal fee varies from place to place, but on average, you can expect to pay between $300 and $600 for a standard single-family home appraisal. Regularly, the cost of an appraisal is based on the size of the property, its location, and the complexity of the job.

In cities with high-end real estate markets, an appraisal fee can ascend from $500 to $800, while more luxurious and unique real estate can exceed the $1,000 mark for an appraisal. The availability of appraisers in an area can also affect the appraisal cost, so buyers can see higher costs in rural areas

More on home appraisals

Determining the fair market value of a property is an essential part of the real estate transaction process. Buyers, sellers, and loan originators rely on these reports to ensure all parties know the financial value of what they’re getting. If you have any questions about the home appraisal in your transaction, your real estate professional can be a knowledgeable resource.