Whether you're buying or selling a home, a critical step of the process is the home appraisal. As a buyer, a key part of getting a mortgage is having an appraisal performed to confirm the sales price for the lender. For sellers, a good appraisal is important to secure the best price possible for your house.
Why Lenders Want an Appraisal
An appraisal is an unbiased, professional estimate of the value of a property for sale. Lenders always require a home appraisal before they'll issue a mortgage because they want to protect their investment; if the actual market value of a property is lower than the sales price and if the buyer defaults on the mortgage, the lender won't be able to sell the property for enough money to cover the loan.
If you're refinancing, you might receive a property inspection waiver (PIW) if the loan amount is significantly less than the estimated value of the home, but don't count on it. Even if your loan-to-value ratio is very low, PIWs are rarely granted.
How the Appraisal Process Works
The appraisal usually happens after an offer has been made and the home has been inspected. As the buyer, you'll pay for the appraisal and most likely have to arrange for it to be done as well. This is the case even though an appraisal's purpose is to protect the lender, not you.
Once it's complete, the report is usually sent directly to the lender. You can request that a copy be sent to you as well. This generally doesn't happen automatically—you'll have to ask.
The price can depend on your property type and location. More expensive homes or homes that have more than one unit will typically cost more. For an average size single-family home, the average cost of a professional appraisal is $300-$450. For a larger home, the average cost is $500-$800. Expect the appraisal process to take from three to 10 business days. The appraiser should be a qualified professional who is licensed or certified to do the work and has no direct or indirect interest in the transaction.
Using Comps to Determine Market Value
The appraiser should know the area the home is in and will analyze the neighborhood as well as the details and condition of the house to provide an assessment of the fair market value.
The most important component involved in arriving at a property's value is called comparable sales, or "comps." These are similar properties, usually located within a mile or so of the home in question, which have sold in the last 90 days.
The appraiser compares several of the property's features against the comps to arrive at the value. Factors include square footage, appearance, amenities, and condition.
For example, a large four-bedroom home in an area where mostly three-bedroom homes have recently sold will likely have a higher value than those comps. Likewise, a house with peeling paint and a patchy lawn in a well-manicured subdivision will typically appraise at a lower value than otherwise similar properties.
When the Property Appraises for Less Than the Sales Price
Sometimes the appraised value of a house comes in lower than expected. This can affect several aspects of the sale.
If the lender is deciding your loan amount as a percentage of the property price, it will choose either the sales price or the appraised value, whichever is less. Most lenders won't loan more than between 80% to 97% of the home's fair market value, so the appraisal value of the home is important when it comes to how much you'll be able to borrow.
If the property appraises at the same as or at more than the sales price, you'll probably get the loan amount you applied for. But if it appraises for less, the lender will most likely reduce the loan amount to match the value of the home according to the appraisal.
Dealing With a Low Appraisal
A low appraisal can delay or even cancel a sale; buyers and lenders don't want to overpay for a house, and sellers may not want to drastically lower the price they were hoping to get.
You have a few options if the appraisal comes in low. If you wrote your offer contract to include a contingency that requires that the property be valued at the selling price or higher, you can walk away from the deal.
If you're buying, another option is to try to negotiate with the seller to reduce the sales price. A third alternative might be to put more money down to cover the difference between the appraised value and the sales price.
And you can always dispute the appraisal. Find out what comparable sales were used and ask your agent if they're appropriate. Your agent might be more familiar with the area than the appraiser was and might be able to locate additional comps to support a higher valuation.