Even if you don’t consider yourself to be especially tight with your purse strings, it’s likely that when you’re purchasing a big-ticket item—such as a television or a new laptop—you’re checking around to see how much it costs on average and what the very low end and high end of the pricing looks like. The reason why? You want to understand why it’s valued so much in order to justify the expense. So then what is an appraisal? More or less the same thing, just on a grander scale.
The same sort of principle exists when you buy a home—but instead of you doing research before you add something to your cart, it’s your lender sending in a professional to evaluate the home (and the comparable homes surrounding it), which is called an appraisal.
Whether you’re a first-time homebuyer or it’s been a while since you’ve bought and sold a home, the appraisal part of the homebuying process can be nerve-wracking and sometimes confusing. Here’s what you need to know about how it works and what an appraisal can do during a real estate transaction.
What is an appraisal?
Just like you wouldn’t want to spend your hard-earned money on a television that wasn’t really worth it, your lender isn’t going to want to shell out a penny more than what a house is worth. So, how do you tell what it’s worth? You have to use the services of a trained professional who can give their opinion of what the home’s fair market value is.
Although the seller and the seller’s agent set the price, the lender wants to ensure that price is realistic. In order to find out if this is the case, the lender relies on unbiased real estate appraisers who can go out to the house, verify its condition and its features, and compare it to homes that have recently sold in the area. All of these factors will help the appraiser assign value to the house.
How do appraisals work?
So, exactly how do appraisals work? First, you need to be at the point in the real estate transaction where an offer has been accepted by the seller and typically seven days after the inspection has been done. Then, the lender will send in a licensed appraiser to evaluate the home. To keep things unbiased, the buyer, seller and even the lender can’t choose the appraiser. Usually, the lender will order the appraisal using an appraisal management company or they will use an independent in-house appraisal department.
Once the appraiser arrives at the home, their job is to look at the state of things permanently attached to the house (not furniture or other movable items) to determine the value.
“During the appraisal, the appraiser performs several tasks,” said Jeff Clark, an appraiser with Buckeye Appraising in Columbus, Ohio. “They include taking interior and exterior photos, measuring the overall square footage of each level as well as finished areas below grade, and looking for recent updates as well as deferred maintenance.”
A common misconception about the home appraisal process, however, is that it’s another level of home inspection, Clark said. Appraisers are there strictly to determine value for the lender—not give the seller or the buyer a laundry list of things to take care of. And although they’re looking for updates, an appraiser is not evaluating them based on aesthetics or how clean something is. They are looking purely at what shape the house is in (e.g., whether there’s chipped or peeling paint, water stains, or signs of pests).
“While an appraiser will perform a cursory observation for damage and deferred maintenance, their purpose is generally to estimate how any obvious deficiencies affect fair market value,” he said.
After the in-person walk-through, the appraiser will prepare a report for the lender and the buyer, which typically includes notes on the square footage and overall condition of the house, any damage, improvements, and information on recent comparable sales in the neighborhood.
What appraisals can (and can’t) tell you
Even if your lender or real estate agent takes the time to explain it, the home appraisal process can still be confusing for buyers and sellers. (Don’t beat yourself up if you’re Googling “What does appraisal mean?” after talking to your agent or lender.)
Often, what throws buyers and sellers (and really, particularly sellers) is that a house appraisal can’t tell you how new or shiny the appliances are, how lush the landscaping is or how contemporary the flooring is. In other words: An appraisal cannot evaluate things based on how aesthetically pleasing they are.
According to Clark, many homeowners who have invested money into home improvement projects expect to get that full return on the money they spent in terms of value. But this isn’t usually the case.
“A typical example is the claim that that homeowner will get their full return on investment in replacement windows, flooring, HVAC, etc.,” Clark said. “In actuality, most of the investments made by homeowners are, in reality, needed due to normal wear and tear, and simply are required to maintain a condition rating that is typical for the neighborhood. While a typical buyer may pay a little more for that upgraded flooring, it’s a fraction of the overall investment.”
What an appraisal can tell you, however, is how much a home is worth based on its features as well as its neighborhood and comparable sales.
Appraisal consequences for buyers and sellers
Once the appraiser delivers the final report to the lender, there are a few outcomes for the buyer and seller. If the appraisal comes in right on target of the purchase price, typically the buyer and seller are both satisfied and the deal can close. But, if the appraisal comes in too high or too low, there can be consequences on either side of the table.
If the appraisal comes in lower than the purchase price, this can be a big problem for the buyer, explains Megan Hornsby, a real estate agent in Toledo, Ohio.
“The buyer would have to bring the difference in their down payment or the seller has to reduce their price in order for the sale to go through,” she said.
Because many buyers don’t have thousands of dollars in cash just sitting around, this may mean the deal is done—unless the seller agrees to a lower purchase price (a tall order for anyone who is looking to sell their home for a profit). A low appraisal can also spell bad news for the seller, too, who was likely counting on the sale of this house to fund the purchase of another one.
If there is disagreement with the appraisal, a seller can appeal it on what’s called a reconsideration of value and request that the lender order a second appraisal. However, there’s no guarantee that the second appraisal will reveal any new findings.
A high appraisal, however, is very good news for the buyer.
“If the appraisal comes in high—congrats! You’re getting a great deal,” said Hornsby.
Value is in the eye of the appraiser
A house appraisal is a necessary (albeit anxiety-inducing) part of the homebuying process for both the buyer and seller. The buyer is looking to get all of the funding they need from their lender, and the seller is looking to validate their contract price, so a lot is riding on the numbers coming in the way they want.
Appraisals don’t concern themselves with how trendy a home is or how nice it’s furnished, but instead look at the black-and-white picture of a house—whether or not it’s been properly maintained and what its inherent features are (number of rooms, square footage and its amenities).
Although licensed appraisers do their best to remain as objective as possible when evaluating a home, at the end of the day they are human, which means opinions can vary and mistakes can be made.
“Appraisals are key for determining value, although if three appraisers viewed a home and did a report, they may all have a different opinion on how much the home is worth,” said Hornsby.
If there’s ever a question about an appraisal coming in too low, talk to your lender or your agent, who will help you with the next steps.