What is a Home Appraisal? A Guide to Value, Process, and Cost for Buyers and Sellers

A home appraisal is an unbiased professional opinion of a home’s fair market value, a critical step in most mortgage and refinancing transactions. For buyers, it ensures the loan amount does not exceed the property's worth. For sellers, it validates the asking price. If the appraisal value is lower than the purchase price, buyers may need to renegotiate, bring more cash to closing, or, if they have an appraisal contingency, walk away from the deal. The process typically takes 7-10 days for a full report and costs between $200 and $600 on average.

What is the Purpose of a Home Appraisal?

Lenders require a home appraisal to protect their investment. The appraisal confirms that the property serves as sufficient collateral for the mortgage loan. If a borrower defaults, the lender needs to be confident they can recoup the loan amount by selling the property. This objective valuation is also used when refinancing a mortgage to determine the current loan-to-value ratio (LTV), which influences new loan terms. It’s a risk management tool for the financial institution, ensuring they are not lending more money than the home is worth.

How Does a Home Appraisal Differ from a Home Inspection?

While both are important in a real estate transaction, a home appraisal and a home inspection serve distinct purposes. An appraisal focuses on determining the property's fair market value for the lender. An inspection is a more detailed evaluation of the home's physical condition for the buyer.

What Do Appraisers Look For During the Valuation?

A certified appraiser conducts a thorough assessment based on standardized methods, primarily using the Uniform Residential Appraisal Report (URAR). This report is the most common type accepted by lenders. The appraiser evaluates:

• Property Characteristics: Square footage, number of bedrooms and bathrooms, lot size, age, and overall condition of the structure, roof, and foundation.
• Interior and Exterior Condition: They note the quality of construction, any updates or upgrades, and the condition of appliances. Damage or hazards that decrease value are also recorded.
• Comparable Sales (Comps): The appraiser analyzes recent sales of similar homes in the same neighborhood. Data from these comps is adjusted for differences to help determine a fair market value for the subject property.
• Location and Neighborhood: Proximity to amenities, school districts, and the general desirability of the area are factored into the valuation.

What Can You Do if the Appraisal is Low?

A low appraisal can disrupt a sale, but it’s not always a dead end. Based on our experience assessment, here are the typical options:

• Renegotiate the Price: The buyer can ask the seller to lower the sale price to match the appraised value.
• Challenge the Appraisal: The buyer or their agent can submit a formal appeal to the lender if they believe the appraisal contains errors, such as incorrect square footage or inappropriate comparable properties.
• Pay the Difference: The buyer can choose to pay the difference between the appraised value and the purchase price out of pocket.
• Walk Away: If an appraisal contingency was included in the purchase agreement, the buyer can terminate the contract and typically have their earnest money deposit returned.

Practical Tips for a Successful Appraisal

For Sellers:

• Provide a List of Upgrades: Give the appraiser a detailed list of significant improvements made to the home, such as a new roof, kitchen renovation, or energy-efficient windows.
• Enhance Curb Appeal: A well-maintained exterior creates a strong first impression. Simple tasks like mowing the lawn and cleaning the walkway can help.
• Clean and Declutter: A clean home allows the appraiser to easily see its features and suggests the property has been well-cared for.

For Buyers:

• Include an Appraisal Contingency: This clause in your offer protects you in case the appraisal comes in low, allowing you to back out without losing your deposit.
• Be Realistic with Your Offer: In competitive markets, offering significantly over the asking price can lead to appraisal gaps if the valuation doesn't support the sale price.

For a smooth and informed real estate transaction, understanding the home appraisal process is essential for all parties involved. By knowing what to expect and how to prepare, you can navigate this critical step with confidence.