What Is a Home Appraisal?

by Hello Blue
April 30, 2020
Reading Time: 8 minutes

What’s my home worth?”

The answer depends on who you ask. 

Every seller and buyer have opinions as to what a home is worth. And, more times than not, negotiation is required because sellers and buyers will likely never agree upon a sales price – at least, at the outset.

And despite all the work that leads to a signed purchase agreement – at the agreed-upon price, a real estate sale often hinges upon the licensed individual whose opinion of value matters most to the mortgage lender – the appraiser. 

An official appraisal by a certified appraising professional is generally not ordered until the buyer has applied for home financing. And often, the appraisal’s timing – so late in the process – gives it the potential to disrupt what was, up to that point, a smooth transaction.

What is a residential real estate appraisal? 

A residential real estate appraisal is the formalized document on which a certified/licensed appraiser provides an opinion/estimate of value based on pre-determined USPAP (Uniform Standards of Professional Appraisal Practice) guidelines and current market data.

The appraisal is the report that a lender uses to determine the objective value of a residential real estate property that is being used as collateral -or the pledged property – for a mortgage the lender is considering offering to homeowners.

A residential real estate appraisal is a full evaluation of the real property that highlights not only an estimate of value but the home’s –

  • Condition
  • Features
  • Flaws
  • Size, to name a few.

The appraisal report helps lenders determine if they are approving a mortgage loan for more than the property’s value. Indirectly, an appraisal report can help protect the buyer as well, that is, unless the buyer has opted for an appraisal contingency within the purchase contract. In that instance, an appraisal would offer no protection for a buyer as the buyer has proactively chosen to waive this protective contingency.

An appraisal report is an integral part of the mortgage process but also has other valuable uses. These include – 

  • Valuing property that is to be divided, i.e., a divorce situation or jointly inherited property.
  • Valuing property for estate purposes.
  • Valuing property for second mortgages or home equity lines of credit, among others.

Who Performs a Home Appraisal? 

A licensed or certified real estate appraiser offers an estimate of value based on market data and expert opinion. A licensed/certified real estate appraiser must be qualified to estimate the value of the real property based on – 

  • The laws and regulations that are unique in the state in which they work.
  • The guidelines for appraising real estate based on the mortgage product – examples would include being qualified to evaluate for the FHA (the Federal Housing Authority), the VA (the Veteran’s Administration), the USDA the (United States Department of Agriculture) or any other government-related loan like FNMA(the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation).

Appraisals are the basis of most mortgage loans and, therefore, play a significant role in mortgage lending approvals and the entire mortgage approval process. However, it is noted that there are certain circumstances where an agent may call on the services of a licensed appraiser. Still, generally, this will be for other purposes other than mortgage lending.

The cost of the appraisal depends on the home’s location, the lender, the mortgage product (i.e., FHA v. FNMA), and the type of property being appraised. As a general rule, a one-family appraisal is typically the least expensive of all appraisals. However, this is not always true, especially if the one-family has enormous acreage or is quite pricey. The average national cost of one family or condominium appraisal is roughly between $300 and $400; however, cities with higher labor costs may charge more for the same single-family or condo appraisal report.

Appraisal costs increase as the appraisal report covers the estimate of a 1-family to a 2-family to a 3-family and so on. It is essential to recognize that if an appraisal is done for an FNMA mortgage, the borrower will likely need another appraisal if they switch to a VA or FHA loan. This is true unless the original appraiser is licensed to prepare appraisers for both mortgage financing sources.  

Buyers and agents do not need to worry about the lender and the appraiser creating a joint conflict of interest because there are guidelines that strictly prohibit that from happening.

Home Appraisals v Home Inspections

While it may seem like a home inspector and home appraiser are tasked with the same responsibilities, the reality is each professional has an entirely different professional objective.

  • A certified or licensed appraiser focuses on the home’s value.
  • A certified or licensed home inspector focuses on the home’s ‘health’ and functionality. 

Home appraisals, as noted previously, are an integral part of the mortgage lending process. For buyers in need of financing, a home appraisal is a requirement. Conversely, as important as a home inspection is, it is typically only optional. A buyer can select to protect their substantial investment with a home inspection or decide not to.

While an appraiser will note apparent issues in the home like a crack in the wall or standing water, the only recommendations from an appraiser will be those issues that must be corrected and require a return inspection by the appraiser.  A conditional appraisal is generally known as a ‘subject to’ assessment and happens fairly often.

But an appraiser will not require an electrical system upgrade unless there is clear and present danger from the situation. However, they will make a note of the aging system in the report, so the buyers have an awareness of this issue.

Home inspectors, on the other hand, are tasked with the responsibility of describing and noting the home’s current condition, plus alert the buyers to any potential health or safety issues. Primarily, a home inspector assists buyers in making a well-informed real estate purchase and offers options for further negotiations of needed repairs. Additionally, a home inspector may request more specialized inspections from engineers or electricians should they feel the situation warrants it.

How does a Home Appraiser Create an Opinion of Value with Market Data?

An appraiser views a home in a number of ways. While an appraiser does not really care about the clutter of a room or the decorations of a home, they do care about measuring the size of the house and inspecting the property thoroughly. 

Appraisers use standardized forms to list market data, plus the appropriate adjustments made for the subject property when compared to recent sales. An appraiser will –

  • Consider the general condition of the property.
  • Review the home’s size, age, style.
  • Document the number of bedrooms, bathrooms, and the total number of rooms.
  • Evaluate existing obsolescence.
  • Determine the location, the neighborhood, and view.
  • List the home’s upgrades, renovations, and amenities, among others.

Appraisers further document their reports with many photographic views to help the lender visualize the collateral of their investment. Pictures include views from outside, the inside, the neighborhood, the basement, the attic, and any features or flaws in the home. 

Neighborhood features that may influence the value of the subject property will also be noted and photographed – i.e., train tracks, high-voltage electric lines, or gas stations, to name a few.

Market data that is used by appraisers include recent sales of similar homes (known as comparables or ‘comps’)  in the neighborhood that meet vital criteria -like size, condition, upgrades, or features, etc. This valuation approach is the Sales Comparison approach. When these mathematical adjustments have been calculated, the appraiser can then estimate the home’s fair market value. 

Appraisers can also estimate value based on two others approaches based on the type of property they are valuing –

  • The cost approach.
  • The income approach.

Appraisers use a minimum of three recent sales of homes that are similar to the subject in size, age, and area, among other important features. Should two appraisals use different comparable sales, the values will likely differ. This generally happens when two appraisals are done separated by a period of time where new comparables (i.e., new sales) are available.

However, it is essential to note that appraisers follow strict USPAP guidelines, which limit the age of the comparables that can be used in a residential real estate appraisal. Appraisers prefer to use recent sales that are less than 90 days old; however, should there be no similar sales in that 3-month time frame, appraisers will look back further in time to find comps that support the subject property’s value. Depending on the situation, some comps can be as old as one year from the sale date.

Another way to locate hard-to-find comps is to extend the distance of available comps. This can be dangerous if the more extensive search provides recent sales from neighborhoods with differing properties – either higher-priced or lower-priced. Appraisers begin with their analysis using three comps, but some may use up to six if the other comps are relevant and recent.

Your real estate agent can be quite helpful when listing a home as they can research recent sales to determine what an appraiser would find when estimating the value of the subject property. If there are some sales within a year that will hurt a potential appraisal, waiting a few months until those sales drop outside of one year can help increase the value of an assessment.

Can Appraised Values Differ for the Same Property? If so, Why?

The reality is an appraised value is merely a professional’s opinion of value. And while appraisers are qualified experts who have been certified or licensed in their field, each has their own opinion. It is for this reason that appraising is viewed as more of an art than a science.

Appraised values can differ because of the purpose of the appraisal, the timing of the report, or the source of mortgage funding. The criteria for an FHA appraisal differs from the appraisal requirements of Fannie Mae or the VA. However, these differences generally have more to do with safety requirements than value.

What should sellers do to prepare for the appraisal and boost your home’s value?

This question has several answers, depending upon who you ask. 

Appraisers are tasked with assessing a home in an ‘as-is’ condition unless extenuating circumstances exist. Therefore, the best way to prepare for an appraisal is by preparing a list of recent repairs and upgrades (including dates, projects, and costs, if possible) that will make it easy for an appraiser to note these improvements. 

And while the appraisal is done as-is, it helps to keep the home uncluttered to keep all areas open and available to the appraiser. A real estate agent is usually quite helpful in prepping a home before the appraiser arrives.  

What Happens if the Appraisal Comes in Lower than the Sales Price?

An appraised value is the appraiser’s estimate of value at a moment in time. And frankly, the appraiser’s job is not to match a value to the sales price, but to offer an opinion of value based on reliable, relevant market data.

So, if an appraised value is calculated below the mutually agreed-on sales price, the seller and buyer have several options –

  • A seller or buyer can appeal the appraisal decision with the lender. Agents and lenders typically work together to locate comps that support the sales price.
  • If the buyer has a mortgage contingency, essentially, the buyer can either re-negotiate with the seller to a lower price or choose to walk away from the transaction by exercising their mortgage contingency in the purchase agreement.

If the appraised value remains unchanged and the buyer cannot obtain the necessary financing, the seller can elect to lower the sales price of the home, which would essentially allow the funding to proceed as planned.

If the seller refuses to reduce the home’s list price, and the buyers still want to own the property, the buyers must pony-up a larger down payment to make up for the difference. 

Buyers and sellers can ask for, and pay, for another appraisal; however, that decision remains with the lender. The fee can be negotiated to be paid by the seller or buyer.

The Take-Away 

Sellers sometimes get cute and try to help buyers purchase their home by agreeing to pay their closing costs -by raising the purchase price to cover the buyer’s closing costs. This can work but often backfires when the appraised value does not support the artificially ‘inflated’ purchase price.

Buyer qualifications do not matter when an appraised value is lower than the purchase price. 

Appraisals are a critical part of the home buying or selling process. Home appraisals can impact the sale of the home, so sellers must understand the appraisal’s purpose and process.