10 Important Things to Know About Home Appraisals
One of the hurdles you’ll encounter when buying or selling a home is going through the process of completing a home appraisal. But before we go into specifics, it’s important to realize that an appraisal is quite different from an inspection – while a home inspection tries to uncover any underlying issues in the home that the buyer should be aware of, a home appraisal is a process that determines the market value of the home by considering many different factors, including the condition of the property itself as well as the surrounding neighborhood.
We understand that buying or selling a home is a complicated process, but don’t worry – we’re here to help! Here are 10 important aspects of a home appraisal, especially curated for you to better understand every aspect of the appraisal process. After all, when you’re buying or selling a home we recommend educating yourself as much as you can – this will lead to a true peace of mind, trust us.
So, Why Are Appraisals Important?
You’ve probably wondered at some point why appraisals are even required in the first place, and there’s actually a very simple answer to that: banks and other mortgage lenders require it. To put it simply, the bank needs to know that the dollar amount of the home loan they extended is equivalent to the actual value of the home. In a way, it’s the bank’s own form of insurance. If you default on your mortgage at some point, the bank can rest assured that they can foreclose on your home and not lose a lot of money in the process.
Appraisals Take Less Time Than You Think
Contrary to popular belief, most appraisals require the appraiser itself to only be on the property for just 20 minutes! It’s good to know that such an integral part of the homebuying process won’t take up a lot of your time – these days, most of the appraiser’s work happens back at their office, where numbers and figures and historical data is plugged into algorithms that work in tandem to come up with the home’s appraisal value.
Appraisers are required to follow the Fannie Mae Form 1004 which requires a physical examination of the property to confirm the following: the square footage of the living area, the overall size of the lot, and other data such as the number of bedrooms, when the house was built, etc. This aspect of the home appraisal is very data-driven and experienced appraisers know exactly what to look for which can lead to a very expedited process – nevertheless, we always recommend for the seller’s real estate agent to be present to point out any important upgrades or renovations that are significant enough to raise the home’s appraisal value.
Yes, the Neighborhood Has an Impact
Another interesting aspect of home appraisals is that yes, your neighbors matter! Have you ever heard someone complain about the house down the street that is bringing down the value of the entire neighborhood thanks to their unkempt lawn and crumbling driveway? As it turns out, it’s true – the value of your own is greatly impacted by the sales price of similar homes in your neighborhood. Your neighbors – not you – have a big impact on how the market is set for home prices, and it’s yet another factor that comes into play when an appraisal is done.
What’s even more problematic than a neighbor with a consistently messy lawn are when homes in your area suffer foreclosures and something called “short sales” – which is when a homeowner in financial trouble sells their home for less than the amount owed – we call these “distressed sales” and they can significantly lower property values of comparable homes in the area.
Fortunately, most appraisers will do their best to exclude foreclosed homes and short sales if there are accurate comparable homes nearby to you, and that’s the sign of a great appraiser! However, sometimes it’s impossible to find comparable homes in the area and that’s when you will see a decreased appraisal value of the home.
A Clean House Makes All the Difference
This little tip may be a little obvious, but it’s true – make sure you are showing off the best version of the house to the appraiser! A little cleaning goes a long way, and a lot of cleaning can be the difference of potentially thousands of dollars in appraisal value.
As we’ve discussed earlier in this article, the home appraisal process is a very technical, data-driven process. But in the end, the appraiser will be in the home for about 20 minutes, and the cleaner your house is, the better your appraisal will be – after all, the appraiser is a person just like you. Put your best foot forward and make sure your home impresses. So put your laundry away, run a polishing cloth over your kitchen countertops, and give the floors a good vacuuming. Trust us – the higher appraisal value you’ll receive will be absolutely worth it in the end!
The Importance of Comparisons
Believe it or not, the whole point of a home appraisal in the first place isn’t to calculate an objective value of a home on its own merits and statistics, but to compare it to other recently sold homes. Sure, the square footage and number of bedrooms matters, but in reality, it’s the amount of money that similar homes in your area sold for that is most important in this process.
The appraisal report itself includes space for three recent “comparable sales” or “comps” as they’re called in the real estate industry. Databases such as MLS (Multiple Listing Services) and public records are used to find the closest matches possible to the home that is being put up for sale. Generally, these comps are in the same neighborhood as the one being offered for sale, but sometimes the area is expanded to an entire zip code when not enough data is available.
Make Sure to Get Ahead of Any Home Repairs
Appraisers are capable of catching any needed home repair that you have been putting off, big or small. The back door that’s been scratched up by the family dog over the years? They’ll catch that. The poor paint job in a bedroom that you rushed through just to get it over with? They’ll catch that too. You know that hole in the wall, where the thing went through the thing and broke the thing? All of these repairs should be completed before the appraiser walks through your front door.
It’s important to remember that not only will damage negatively affect your appraisal – but if your loan is insured by the FHA (Federal Housing Administration), appraisers are required to report damage to them as well.
Appraisals Go Both Ways
Although usually the appraisal goes through the home buyer, sellers can ask for an appraisal, too. In fact, there are certain situations in which a home seller might want to order their own appraisal. There’s situations where you are trying to decide between two real estate agents, each with their own differing suggestions for the initial asking price – paying $300-$400 for an independent appraisal is a perfectly reasonable strategy to find the most accurate market value of the home and then set the price accordingly.
Remember, know that any lender is going to still want their own appraisal, so your initial appraiser’s assessment isn’t necessarily locked in.
Ask For Your Own Copy of the Appraisal Report
Since the buyer pays for the appraisal, they have the right to get a free copy of the full report, and lenders are required to send appraisals to buyers promptly. If the appraisal comes in at a lower price than the one the buyer and seller agreed upon, the buyer will have good ammunition to negotiate a lower price – after all, an appraisal is one of the most important aspects of homebuying.
The only time a seller will see a copy of the appraisal report is if the buyer wants to use it to negotiate this lower sales price. If the appraisal comes back at or above the asking price – great, the seller has no reason to worry about it. In certain real estate markets, the buyer may have to pay cash for the difference between the appraised value and the amount the seller is asking – this situation is rare, but it happens – especially in a very hot market where homes are in high demand.
Communication Is Key
Contrary to popular belief, it’s legal to communicate with an appraiser. Although they’re a non-biased third party, appraisers welcome any and all information that helps them determine the most accurate market value of the home. Whether the seller’s agent finds additional comps on their own and brings them to light or the seller provides receipts for major upgrades or home renovations, an appraiser-seller relationship will always benefit from an abundance of communication.
It goes without saying, but we still have to say it: any type of communication specifically intended to coerce or threaten the appraiser into giving the home an artificially higher value is strictly forbidden. Not only is this practice unethical, the real estate agent and all parties involved can lose their licenses.
Your Options After the Appraisal is Complete
So at the end of the appraisal process, if you feel that the appraisal came in lower than it should have, good news: you can absolutely protest it. Simply contact the lender and they’ll point you in the right direction as far as their procedures for starting an appraisal dispute. Of course, make sure you have your reasons (including documentation!) to support your argument that the appraisal came in too low.
Be sure to include any necessary documentation that you think will help support your case, including photos, records of improvements, even comps of other houses that you feel like should have been included. Your real estate agent should be able to look at the ones that were used in the appraisal and help come up with much better comps.