A home appraisal determines the fair market value of a property. Appraisals are conducted by licensed home appraisers. If you’re applying for a mortgage, your lender will require you to do an appraisal to ensure that you aren’t overpaying for a home. This article covers what happens during an appraisal.
What Is a Home Appraisal?
An appraisal determines if a home’s contract price is appropriate based on a home’s value. Appraisals aren’t legally required in order to purchase a home. However, lenders do require them to confirm home values before approving mortgages. Cash buyers don’t need to worry about home appraisals because they can ultimately decide how much they want to pay for a home without financing requirements hanging over their heads. It’s still a good idea to get an appraisal as a cash buyer to have all the information you need to make a sound decision. It’s not uncommon for sellers to drastically overvalue their homes.
Why Lenders Require Appraisals
Lenders do everything possible to reduce risk. When buyers “overborrow” for homes, this increases risk. A home is the default collateral for a mortgage. In the event of a foreclosure, the lender is less likely to recoup anything near the full amount if the mortgage was inflated compared to the actual value of the home.
How Appraisals Work
What does a home appraisal consist of? By looking at a home’s condition, size, location, and features, a real estate appraiser is able to determine its current fair market value. In addition to viewing a home in person, an appraiser will also look at data from comparable properties. Known as “comps” in the real estate world, comparable properties are similar homes that have recently sold in a specific area. Comp prices often provide the best indicators for what a new listing is worth.
Expect an appraiser to spend time walking through a home to make note of its condition. The appraiser will also use property records to confirm the home’s specifications. Updates, improvements, and special features can all increase a home’s value in comparison to comparable properties in the neighborhood. Here’s a look at 4 surprising factors that can affect a home appraisal:
- 1. Location: Proximity to other neighbors, closeness to the street, local amenities, noise pollution, and other environmental factors actually influence appraisal price. Additionally, proximity to schools and parks can also sway a home’s value.
- 2. Materials: A home’s structural materials play into its value. Home’s constructed from materials that don’t stand up to weather events can actually be valued lower than comparable homes that have been updated with modern materials.
- 3. Curb Appeal: While not the biggest determinant of home value, a home’s outward aesthetic can influence an appraisal. Overgrown plants, cracked driveways, and broken siding are some of the eyesores that can cause a home to lose points.
- 4. Storage Space: Large closets and walk-in closets can give a home’s value a powerful boost.
What happens during a home appraisal can also be influenced by the type of home being appraised. For example, a custom or unusual home will require more research and time.
Appraisers are third-party professionals without any “skin in the game.” While they are commissioned by lenders, they do not operate on behalf of the lender. Their goal is to provide a fact-based, objective analysis of a home’s market value. For this reason, they cannot provide an opinion about if they think the buyer should move forward with the sale based on the home’s market value versus the asking price.
While an appraiser must maintain a neutral stance at all times, they are permitted to speak with the seller and their agent to gather information about the property.
How Long Does an Appraisal Take?
Most appraisals take one to two weeks. During a busy time of year in a busy market, it could take up to four weeks. Your lender will usually schedule an appraisal as soon as your mortgage application is submitted after an offer is accepted.
Here’s What Happens After Appraisal
If the appraisal price comes in close to a home’s asking price, the sale can move forward. If there’s a significant difference between the appraisal price and the asking price, this is what’s known as an appraisal gap. Lenders won’t approve mortgages on homes with appraisal gaps.
Activating the Appraisal Contingency
When faced with an appraisal gap, a buyer has three options. The first is to walk away from the sale. If you’re purchasing a home with a mortgage, your sale contract contains something called a home appraisal contingency. This is a clause in an agreement that permits the buyer to walk away if a home’s appraisal comes in below the offer price. By activating this clause, you’re able to break the contract without losing the earnest money deposit that you provided with your offer to show the seller that you’re serious.
Cash buyers sometimes waive appraisal contingencies in order to make their offers more appealing. If you have a home appraisal done after waiving your contingency, you’ll lose your earnest money deposit if you end the sale because this is a breach of contract.
Moving Forward With Buying a Home After an Appraisal Comes in Low
While a home appraisal that’s too low often ends a home sale, it doesn’t necessarily have to squash your buying plans. If the seller is flexible, the sale can go forward. The most common way this happens is through a new price negotiation.
A seller may be willing to reduce the asking price to something that’s more in line with the appraisal price. While the seller will be taking a hit, this could be the only way that they can sell their home. Some sellers may quickly take the offer to lower their price in order for the deal to go through. Others may decide to end the sale because they would like to hold out for a cash buyer who is able to buy the home regardless of the appraisal gap.
Filling an Appraisal Gap With Cash
A third option is to cover the appraisal gap with your own cash. A lender will still give you a mortgage if you have an appraisal gap if you can cover the difference with your own cash. Of course, not everyone has the extra money to do this. If you have some money to work with, you can consider asking the seller to negotiate the price down to a place where you can comfortably fill in the appraisal gap with the amount of cash that’s available. If the seller refuses, you can then walk away with your earnest money deposit.
Home Appraisal Cost
A home appraisal typically costs between $400 and $500. The buyer pays for the appraisal. In fact, a real estate appraisal should be a line item on the list of anticipated closing costs.
The buyer can’t select the appraiser even though they’re paying the bill. Lenders choose appraisers. Most mortgage companies hire firms that supply appraisers at random to ensure that there are no conflicts of interest that can spring up from using the same appraiser over and over again.
Can You Redo a Home Appraisal?
The goal of a home appraisal isn’t simply to keep doing them until you get the answer you want. Lenders are very reluctant to allow buyers to do additional appraisals if a first appraisal shows an appraisal gap. You may be able to do your own research to convince them to approve a redo.
If you can show proof and documentation of updates or features in a home that were not properly factored into an appraisal, a lender might be interested. Additionally, lenders are sometimes open to second opinions in markets where values are shifting practically overnight. Finally, a second appraisal may be approved if an appraiser’s lack of experience in a market can be used to show that the appraisal value may not be totally accurate.
How Long Is a Home Appraisal Valid?
Most home appraisals are considered valid for 90 days. If you don’t close on time, you may need to pay for a second appraisal.
Final Thoughts on Getting a Home Appraisal
A home appraisal is an important step in getting approved for a mortgage when buying a home. Confirm with your real estate agent that your offer contract contains an appraisal contingency that allows you to back out without losing your earnest money before you submit an offer! If you’re purchasing a home with cash, an appraisal is an important tool for making an informed decision. Finally, don’t assume that you can skip a home inspection just because you’re getting a home appraised. While the appraisal confirms a home’s value, a home inspection confirms its structural soundness and safety.