On Real Estate & More – May 2023

If you are in the market to buy a home, a home appraisal is likely going to be an important part of the process, especially if you are getting a loan. An appraisal is a process where a licensed real estate appraiser determines what they believe to be the fair market value of a home. It assures the lender that the price you’ve agreed to pay for a home is fair. If you need a mortgage to buy a home, your sales contract includes an “appraisal contingency” which allows you to walk away from a home purchase if the appraisal comes in too low to justify the agreed-upon purchase price.

Appraisers have a specific set of factors they use when creating the appraisal. The three most important aspects that are evaluated include:

Living Condition of the Home—Unlike a home inspector, the appraiser isn’t looking for specific faults or issues. Instead, they’ll be assessing the general condition of the property, count the number of bedrooms, make sure there are no safety hazards present and check the functionality of home systems. Their primary focus is to determine if your home is livable, and if it is deemed unsafe, your house’s appraisal value could be much lower than expected or have certain safety items that are required to be completed, (such as straps on the water heater) in order to close.

Home Improvements—For an improvement to increase the value of your home, the upgrade will need to be included; otherwise, the appraiser will not include it in the evaluation. The appraiser will also check for any upgrades you’ve made outside of the main living areas, for example, if you’ve renovated your garage, finished your basement, or installed pavers and an outdoor kitchen around your pool.

Nearby Home Values—Your home isn’t the only one considered when the appraisal is created. The appraiser will make sure to include a brief analysis of similar properties that are located close to your home.

After the appraiser finishes their research, they make a final valuation of the property in a formal report. The appraiser then delivers that report to your lender. Even though most lenders require an appraisal as a condition of a loan closing, the buyer pays for the appraisal unless they negotiate for the seller to pay instead (which is rare).

An appraisal can negatively affect the selling price and mortgage amount for a home. An appraised value that doesn’t match your purchase price could mean trouble. If the house appraises for less than you’ve agreed to pay, the buyer may have to bring more cash in order to close or negotiate a lower purchase price to make the deal work. In some cases, a too-low appraisal could force you to walk away from the transaction.

A hot market can force buyers to make offers well above the asking price. In some cases, buyers may end up agreeing to pay much more than the appraiser finds your home is actually worth. If you have extra money to bring to the table, this might not be a problem, but if you don’t have extra cash on hand, a low appraisal might mean you can’t get financed.

Do you think the appraiser made an error? You may be able to appeal the decision. To start the appeal process, contact your lender. It should be noted that this is a longshot process and appraisers are given the opportunity to correct errors before a new appraisal is ordered.