Home appraisals are an integral part of real estate sales transactions, but they are often misunderstood.  In fact, the idea of the appraisal frequently brings fear and even anger to many purchasers.  To address the need for clarity, here is everything you need to know about home appraisals.

What is a home appraisal?

A home appraisal is an estimate of a home’s value as determined by a licensed appraiser.  In real estate sales and refinances, the home will be appraised for the benefit of the mortgage lender.  The lender wants to be sure that in case of foreclosure, the amount owed can be recouped from the sale of the property.

An appraiser normally evaluates the interior and exterior of the property however, due to the COVID-19 pandemic, they can choose an exterior-only appraisal.  In any case, the appraiser will walk through the property to examine the home’s structure including the roof, foundation, floors, walls, etc.  The appraiser will also note amenities or appliances that can increase the home value.  Finally, appraisers take pictures to document their findings and submit a report to the mortgage lender. 

How does a home appraisal differ from a home inspection?

Home appraisal values are based on the home’s characteristics as well as the community where the home is located.  Appraisers do not make recommendations for the lender or borrower.  In a home inspection, the inspector only checks the home to determine if repairs are needed.  The home inspector will make recommendations for necessary repairs.  

What determines the appraised value? 

There are many factors that affect a property’s appraised value and most of those are beyond the homeowner’s control.  Appraised value is determined by:

• The home’s proximity to shopping and public transportation
• The local school district
• Local housing market trends
• Selling prices of similar homes nearby
• Square footage of the home
• Number of bedrooms and bathrooms
• Condition of the home
• Amenities of the subject home (Ex. Swimming pool or fireplace)
• The appraiser’s judgement

Does a messy house affect a home appraisal?

Generally speaking, a home appraiser is trained to look beyond clothes or toys on the floor to evaluate the home’s features.  However, extreme clutter or dirt can obscure important areas that the appraiser needs to examine.  In such cases, the appraiser would use assumptions resulting in a lower valuation.

Who pays for the appraisal?  How much do they cost?

When the appraisal is needed for a real estate sale, the mortgage lender will hire the appraiser, but the homebuyer pays the expense.  This would be part of the buyer’s closing costs.  For a refinance, the lender hires the appraiser, but the homeowner pays the cost.  Appraisals are recommended for all cash property sales, but they are not necessary.  The cash buyer would be responsible for paying for the appraisal in this case. 

The cost for home appraisals will vary based on the size and location of the home.  In the downstate New York area, the average cost of a home appraisal ranges from $500-$650 for a one-family home.  In some cases, appraisals can exceed $1200 if extra work is required.

What happens when the appraisal is below the contract price?

The benefit of a home appraisal is that it stops the homebuyer from paying too much for the home.  The rationale is that if similar homes cost a certain amount, the buyer should be paying that amount.  In cases where the homebuyer signs a contract to pay more than the appraisal, there are several alternatives.  The buyer can

• terminate the sale if there is an appraisal contingency in the contract,
• ask the seller to lower the sales price to the appraisal value so the transaction can proceed,
• pay more money to cover the difference so the sale can proceed
• request a combination of these choices.  The seller can lower the price, while the buyer puts up more money. In this scenario, both parties will share the burden of the lower appraisal value.

Can anything be done to increase the appraised value?

The mortgage borrower is entitled to a free copy of the appraisal report.  Upon receipt, the borrower should immediately review the report for obvious errors.  It’s possible that the appraiser used the wrong square footage or omitted a bedroom resulting in a lower appraisal.  This problem is easily fixed with proper documentation.

Appraisers rely on historical data which can also result in lower appraisals.  In hot real estate markets, where prices are rising quickly, the higher contract price might be the correct price. 

The mortgage borrower or their real estate agent can be present during the appraisal to point out home improvements or upgrades that an appraiser could overlook. 

The borrower also has the option of requesting a second appraisal which the borrower must also pay for.  In fact, the added cost may be worthwhile if it allows the home sale or refinance to stay on track.  

Final thoughts…

The appraisal stays in effect for 4 months (120 days).  The real estate deal must close during this timeframe, or a new appraisal will be required.  

After learning everything you need to know about home appraisals, you should feel comfortable with the knowledge that home appraisals exist for the borrower’s protection.