You might have heard that the home appraisal process is nerve-racking for sellers, who are eager to see what financial value a professional appraiser places on their home. But buyers don’t find this process smooth sailing, either!
With about 40% of Americans in one survey saying that buying a home is the most stressful event in modern life — and 13% of those respondents worrying after the purchase that they overpaid — the more informed a buyer is, the better.
When associated with a mortgage, an appraisal is a risk-prevention step for the lender that ensures the house is worth more than the amount of money that the buyer wants to borrow. Although the buyer pays for the appraisal (on average it ranges from between $313 and $420 nationwide), the lender is essentially the appraiser’s client and often specifies an “acceptable appraisal” as a contract contingency.
“Most purchase offers are contingent on a property appraising for at least the contract price,” says Mike Ford, a general certified real estate appraiser serving greater metropolitan Los Angeles, and a member of the American Guild of Appraisers. “From that perspective, it is to the borrower’s advantage to know that they are not overpaying for a property.”
But with appraisals coming in low more recently in the tough market for buyers we’ve seen since the onset of the coronavirus pandemic, some buyers may be feeling extra nervous about the process. In January 2020, a home’s contract price was below the appraised value 69% of the time. By January 2021, that number dropped to 52%, analytics and data service provider CoreLogic reported.
Let’s walk through some home appraisal tips so you can better understand this important step in the purchase process and boost your buying confidence.
The value of an appraisal
An appraisal provides reassurance of a property’s value. Some sellers have their homes appraised before listing them on the market to help arrive at a fair asking price.
For buyers, an appraisal is a requirement for most mortgages, both government-backed and conventional. Statistics from the National Association of Realtors® (NAR) show that of all the sales that closed in February 2022, only 22% waived an appraisal contingency, indicating that a majority of buyers are still using a mortgage and thus opting for the required appraisal.
A lender not only uses an appraisal as a quality check but also to arrive at a loan-to-value (LTV) ratio — this helps lenders evaluate the risk level of the loan. This ratio is calculated by dividing the amount borrowed by a property’s appraised value, then expressing the result as a percentage.
For example, if a property appraises at $200,000, and the buyer has $40,000 to put down on the home, then the buyer will need to borrow $160,000 from the lender: $160,000/$200,000 = 0.80, or an 80% loan-to-value ratio. If your LTV ratio is at or below 80%, you will pay a lower interest rate, plus you won’t have to pay mortgage insurance (MI), reducing your monthly mortgage payments.
A property’s appraised value also indicates how much you’ll pay in real estate taxes — and gives you an idea of how any improvements you make can add to your home’s equity.
Objective and impartial
The Uniform Standards of Professional Appraisal Practice — or quality control standards — require an appraiser to be impartial and “not favor a predetermined outcome,” according to the Appraisal Foundation, the nation’s Congressionally authorized source of appraisal standards and qualifications. A lender doesn’t typically contact an appraiser directly but usually uses a third-party appraisal management company to find and hire an appraiser in the buyer’s area.
Appraisers must never take an assignment contingent upon “hitting a number,” the Appraisal Foundation says, and they cannot accept assignments where they can’t be independent and objective.
In the past couple of years, appraisals have been coming in low more frequently than prior research would indicate. In May 2020, 19% of contract home prices were higher than their appraisals, per CoreLogic’s report. NAR statistics show that of the 22% of contracts that were delayed but eventually closed in February 2022, 20% had appraisal issues.
One reason appraisals may be coming in low is due to market conditions that have favored sellers over the last couple of years. Inventory has been low since before 2020, when the coronavirus pandemic exacerbated the issue, and most agents expect that trend to continue. HomeLight’s New Year 2022 Top Agent Insights report found that 68% of agents surveyed said that inventory was lower than they expected in the 4th quarter of 2021, and 84% said they expect the market to continue favoring sellers in 2022.
When inventory is low, buyers may get into bidding wars, pushing offers higher than what a property can be appraised for.
“In the current market, we are seeing offers made on houses that are considerably more than what can be defended in an appraisal,” says Tom Cullen, Chief Appraiser with the Cullen Real Estate and Appraisal, an appraisal company that serves Massachusetts and Rhode Island.
“Because listings are in short supply, there is intense competition among buyers. This is promoting buyers to offer higher prices than what an appraisal can justify.”
That said, in the past appraisers have rarely failed to confirm the contract price. Researchers at the Federal Reserve Bank of Philadelphia found in 2018 that roughly 30% of appraisals precisely equalled the contract price, a finding consistent with other studies. Another study of two decades’ worth of appraisals submitted to the Federal National Mortgage Association, commonly known as Fannie Mae, found more than 90% valued homes at or above the purchase price. In nearly one-third of purchases over the same time period, this study shows appraisals valued properties at exactly the sales price.
I’m always prepared to show them why we’re paying more for the house or less for the house, or just generally why my people identified this as something they want to live in for the next number of years.
- Jeremy Zucker Real Estate AgentCloseJeremy Zucker Real Estate Agent at Keller Williams NY Realty5.0Currently accepting new clients
- Years of Experience 17
- Transactions 233
- Average Price Point $750k
- Single Family Homes 183
How buyers can handle the home appraisal process
You can’t (and shouldn’t!) do anything to influence the appraiser, but you can prepare yourself for what’s to come. Here are seven tips to get you through the process.
1. Know when you need a home appraisal
In most cases, you’ll need an appraisal if you plan to use a mortgage to buy your home. Because your home will serve as collateral if you stop making payments on your loan, lenders want to ensure that the home is worth a similar amount to the loan they’re issuing.
Cash offers don’t require appraisals, and sometimes an all cash buyer will waive the appraisal in an effort to make their offer more attractive. Sellers may prefer an offer that waives the appraisal contingency because it gives them more confidence that the offer will close.
Still, some buyers may want an appraisal even if they’re purchasing a home outright with cash in order to confirm that they’re not overpaying. And buyers with a mortgage shouldn’t give up hope if they want to waive an appraisal in order to make their offer more attractive in a competitive market.
Though they’re rare, some lenders will issue appraisal waivers, which allow a financed offer to proceed without an appraisal if the lender is confident in a home’s value.
2. Know what features impact home value
An appraiser looks at the age of the home, the square footage, the layout, the location, utilities, and various upgrades or renovations. An appraisal also includes an assessment of the home’s condition, such as whether any components are new or show deferred maintenance, deterioration, depreciation, or other wear and tear.
How close is the property to a metropolitan area? To schools? How does its size compare to other properties in the area? In general, a bigger footprint means more value, but if it’s an older home, higher maintenance and energy costs could offset the value of more space.
An appraisal is not equivalent to or a substitute for a home inspection, which is a nuts-and-bolts analysis of a home’s construction and its systems. However, some lenders appraising homes for VA loans or FHA loans will require an appraiser to note particular items on a property, such as chipped or peeling paint, or a lack of handrails on stairways.
Ford says appraisers are also likely to notice obvious safety violations, such as a lack of smoke detectors. In addition, they take into account any conditions that could affect an owner’s ability to use the property the way they want, such as substandard construction, or a home’s location within a flood zone.
A listing agent should ensure that the sellers grant the appraiser access to all areas of the home, similar to when a home inspector visits the property.
“‘Buyer to verify all permits’ is a red flag,” he adds.
If an appraiser suspects something like a finished basement or converted garage wasn’t built properly as living or rentable space, they’ll ask to see permits.
3. Understand the value of other homes in your area
One way that appraisers calculate a home’s value is to compare it to properties that have sold recently and that have similar characteristics, such as age, square footage, and proximity. These sales are called comparable properties, or comps. The listing agent may also provide comps to show how the sellers arrived at an asking price.
On the Mark Appraisals website, a company serving the Atlanta, Georgia, area, the company recommends that sellers provide the most recent tax bill or legal description of the property, any items to be sold with the home (such as appliances), home inspection reports, and a “brag sheet” of the cost, date, and permitting for major home improvements. This helps appraisers find the most accurate comps for the home.
Buyers’ agents also often find comps to explain a home’s perceived value, says Jeremy Zucker, a real estate agent for 14 years serving the White Plains and New Rochelle areas in New York.
“I’m always prepared to show them why we’re paying more for the house or less for the house, or just generally why my people identified this as something they want to live in for the next number of years,” he says.
Comps might not always provide a clear picture of a home’s value, however. In areas where homes don’t sell very quickly or there aren’t very many homes for sale — such as rural markets — finding recently sold comparable properties could be a hefty challenge. And homes with unique features, such as a sweeping view or a waterfront location in a landlocked state, can also present challenges when an appraiser tries to find appropriate comps.
4. Ask your agent how quickly the market is moving
In hot markets like the one we’ve seen since the onset of the coronavirus pandemic, the value of a home can appreciate quickly.
In those cases, the comparable properties, or comps, that an appraiser or an agent might look at could be inaccurate.
When buyers compete for a few properties in a seller’s market, bidding wars often push up home values until they’re higher than other recent sales, making it hard to find accurate comps. This means that appraisals are more likely to come in low.
These issues are the result of lagging sales data. It took a median of 30 days from the initial offer to home sale closing in July 2021, per data from the National Association of Realtors®. That means the house sold a month before an appraiser can use that comp to determine the value of a different home. By then, homes may have appreciated further, making the comp inaccurate.
Your agent can help you know how quickly the market is moving, and they can share that information with your appraiser. Patrick Lyons, a West Virginia real estate agent with 10 years of experience, says that in his market, appraisers have been able to keep up with rapidly appreciating home values.
“The appraisers are moving along with it [the market]. I haven’t seen a bunch come in low,” Lyons says.
5. Wait patiently
Five to ten working days is a good time frame for an appraiser to turn around an appraisal report, Ford said. Uncooperative parties, a lack of permits, defective or dangerous conditions, and other issues “can all add to the time it takes to do the job right.”
The size of the property and the availability of appraisers in your area also can impact the turnaround time and the cost.
6. Discuss your options
If the appraisal comes in at or around the purchase price — or higher than that — you’re in good shape.
If the appraisal comes in below contract price, buyers have three choices: renegotiate with the seller, make up the difference in price, or walk away.
James Krueger, who ranks in the top 1% of listing agents in Houston, once sold a house that went through three potential buyers. The first two backed out after the appraisal came in below contract. The third ended up purchasing the home, but they met in the middle with the seller between the asking price and the appraised value.
A buyer can choose to pay more than what the appraisal says a property is worth, but “they are doing so with full knowledge that the market data does not support the contract price, and they are ‘upside down’ from day one,” Ford says. (This means that the buyer might owe more money for the house than it’s actually worth.)
In a competitive situation with multiple buyers and bids, Zucker says his buyers have said they’re willing to cover the first $10,000, or 1% to 2% of an appraisal shortfall.
“We talk about what we’re willing to cover because otherwise, the deal could fall apart.”
In those cases, the buyers are already thinking of repainting and so on to make the house their own, so “the extra 1% or 2% usually does not make a difference,” he says. “Part of the conversation is also, ‘This is not a 3-year plan. You’re buying this house, and I want you to be there for 10 or more years.’”
7. Consider an appraisal reevaluation or an independent appraisal
Negotiations aside, if the appraisal price seems much lower than the contract price, your agent (or the listing agent) can ask the appraiser to reevaluate their report. Sometimes appraisers can make mistakes in the basic data (such as the number of bedrooms or baths), or they need context for the comps, such as if a recent sale for a lower-than-typical price was between family members — or if a more-recent sale is available that changes the perspective.
You also can pay for an independent appraisal. All states require appraisers to be state-certified or licensed, but as in any profession, some appraisers are more qualified than others.
Ford suggests that buyers ask how much of their appraisal fee will go toward the appraisal itself as opposed to an appraisal management company or appraisal services firm, where about 41% of appraisers in 2019 worked, according to the Appraisal Institute.
“If you paid $1,000 and the appraisal firm kept $500 or $600, then chances are, your appraiser may not be the most qualified,” he says.
As noted, the average cost of an appraisal nationwide varies between $313 and $420, but that cost can vary depending on the complexity of the property and the area where you live, according to HomeAdvisor.com. An appraisal in a metropolitan area can start at $600.
While it might not be economical, a separate appraisal could be worth the peace of mind, depending on the property and the situation.
How sellers can handle the home appraisal process
1. Price your home wisely
The first step sellers can take to make sure an appraisal doesn’t come in low is to make sure they set the list price correctly. In a seller’s market, you might be tempted to set the list price high, but it won’t benefit you in the long run if a deal won’t close.
When thinking about setting your home’s price, it’s important to consider what recently priced homes have sold for. Your agent can help you find comps in your area that may give you an idea of what your home is worth in the current market.
You may also consider having an independent appraisal done before you list your home to know what it’s worth. That way, you can have a sense of what a bank appraisal may mark your home’s value. A seller whose home has unique features, such as one with solar panels or a detached in-law suite, a house in a rural area, or one with a lot of acreage, might consider an independent appraisal since it can be difficult to find comparable properties.
“It’s often prudent to have a private/independent appraisal done on the house that you intend to sell before a bank appraiser arrives on the scene,” Cullen says.
“Knowing exactly what your home is worth before accepting an offer can give you peace of mind in choosing the right offer to accept, or knowing you’ve made the right financial decision — especially in this current market where you may be faced with a multiple-offer situation.”
2. Choose your offer carefully
If you’re in a multiple-offer situation, it might be tempting to go with the highest dollar amount. After all, who doesn’t want more money?
But it’s important to select a deal that can close. If a buyer offers tens of thousands of dollars over asking price and needs a mortgage, the deal could be in danger of falling through if the appraisal comes in low. Remember, the lender isn’t going to give the buyer more money than your house is worth.
Your agent can help you weigh the offers on the table to choose the right one. If a buyer is going way over asking, but is making up the difference in cash, you may not have to worry as much about an appraisal coming in low.
2. Make sure the appraiser knows about any upgrades you’ve made
Did you remodel your kitchen or install new windows before listing your home? Be sure to let your appraiser know. Upgrades can increase your home’s value, and this knowledge can help an appraiser better price your home.
Lyons has his clients make a list of any upgrades they completed within the last five years — no matter how small — and leave it for the appraiser.
“You might think it’s small, but it might be worth something to the appraiser,” Lyons says.
3. Provide documentation of any offers you received
If you’re lucky enough to receive multiple offers, they might come in handy during the appraisal process.
Your other offers can tell your appraiser whether your home was priced accurately. Sellers should make a list of their other offers and show them to the appraiser, so they can take those offers into consideration when preparing the appraisal report.
Here’s an example of how offers can help an appraisal: Say the comparable sales give a probable sale price range of $400,000 to $430,000. If you receive offers for $425,000, $430,000, and $435,000, it might convince the appraiser to value your home at the higher end of the spectrum.
5. Clean the house and fix any small issues
It’s important for you to put your best foot forward for an appraiser. While you can’t increase the number of bedrooms your home has or its square footage, you can control how those rooms are arranged.
Cleaning your house, making sure gardens are trimmed, and fixing minor issues like a loose doorknob can all go a long way in making sure an appraiser gets the best possible impression of your home.
6. Make sure all parts of the home are accessible
During their physical inspection of the home, an appraisal will want access to all elements — that includes basements, electrical panels, and pretty much every other area.
Though an appraiser should look at every part of the home, they won’t move your personal belongings to access a bedroom or a closet, so it’s important to make sure the path is clear for them so that they can get a proper sense of the house and its worth.
7. You can (and should) attend the appraisal
Unlike with a home inspection, sellers are usually able to attend an appraisal. In fact, they should attend, if possible.
Though you can’t influence an appraiser during the process, you can provide them with additional information to take into consideration. If your home is near a popular park, or if you want to provide comps to show how you arrived at your listing price, the appraiser should welcome that information.
Attending the appraisal can also give you the chance to point out any upgrades you made, and it can ensure that they were able to access all of the rooms in the house.
8. Discuss your options (if necessary) with your agent
If your appraisal comes in low, it’s important to remember that you have a number of options.
You can walk away from the sale and try to find a new buyer. But with a low appraisal, you may need to adjust your expectations for the listing price.
Or you can reopen negotiations by agreeing to meet the buyer at the appraisal price. If a buyer still wants to preserve the deal, they may offer to make up the difference with cash. In other cases, sellers might ask buyers to cover 50% of the discrepancy, and they’ll cover the other half.
“If it’s really close, you might be able to get both sides to kick in 50/50 to make the deal work,” Lyons says.
How homeowners can handle the home appraisal process
Buyers and sellers aren’t the only people who might consider having their home appraised. If a homeowner is looking to refinance their mortgage, they’ll likely need an appraisal as well.
Since refinancing your loan is still a mortgage, an appraisal is often required. But there are some exceptions. If you’re refinancing through the Federal Housing Administration’s (FHA) streamline refinance, or the VA’s interest rate reduction refinance loan, then you won’t need another appraisal as these government programs don’t require one. If you have enough equity in the house, a lender may also waive the appraisal.
If you do need an appraisal, your lender will likely present you with a pre-approved list of appraisers to work with.
“In 95% of scenarios, the lender will choose the appraiser from a roster of appraisers that they have, which are on their ‘approved list.’ The appraisers on a lender’s ‘approved list’ are vetted to ensure that the appraiser’s license, errors and omissions insurance, and continuing education are up to date. Only in rare cases will a lender agree to use an appraiser that is not on that roster,” Cullen says.
1. Shop around for refinance terms
If you’re thinking of refinancing your home, the first step will be to shop around to find the lender who’s offering you the best terms, whether that be a lower interest rate or better loan terms.
“It’s never, never a bad idea to check around at least three or four places,” Lyons says. “You might be able to get a better deal with better rates.”
If you’re looking to do a cash-out refinance, where you’ll be taking out a new loan for more than the remaining balance owed on the house in order to access liquid cash, it’s also important to factor in how the appraisal could affect the terms. You might not want to go with the lender offering the most cash in case the appraisal comes in low, causing the loan to fall through.
On the other hand, if the appraisal comes in high, you may be eligible for more cash out or better loan terms.
2. Compare what lenders are offering to home values in your area
To assess whether or not a deal is a good fit for you, it might be beneficial to consult comparable sales in your area. That way, you’ll have a better sense of what your home is worth.
If you’re still in touch with the buyer’s agent who sold you your home, they may be able to help you find comps. Otherwise, reaching out to an independent appraiser or another local agent can help you find comparable properties.
3. Ask a friend for their opinion as you declutter
As with sellers, homebuyers who are looking to get an appraisal should declutter their homes, repair any minor issues, and provide a list of upgrades they’ve made to an appraiser.
But when it comes to a home that you’re actively living in, it may be hard to see where things could improve. You may have lived in a house for years and remember hosting family birthday parties in the living room or eating dinners every night around the dining room table.
In these cases, getting an objective opinion from a friend or a family member about where you might improve could help you get ready for an appraisal.
What to do if an appraisal comes in low
When an appraisal comes in low, all parties will likely experience disappointment. A buyer may wonder if they’re about to lose the home of their dreams, while a seller may feel exhausted by the prospect of putting their home back on the market and trying to find a new buyer. Homeowners may feel disappointed with their refinance terms.
Buyers and sellers should talk with their real estate agents about their experience with the appraisal process, and how they’d recommend handling any shortfall. For buyers it’s especially important to consider how willing you should be to walk away from a deal that’s not right for you. The elation over your purchase won’t last if concerns about whether you overpaid give you buyer’s remorse.
As Ford notes, “Don’t become so invested in the property that you are willing to automatically keep the deal going, even if the value is significantly out of the supported range.”
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