An appraisal is a significant step in the process of buying a home or refinancing a home.
What Is An Appraisal?
An appraisal is an opinion of the estimated value of a home arrived at by an inspection of the property and comparison of recently sold homes in the area to estimate the value.
Before you complete the home buying, selling or refinancing, it’s required that you first get an appraisal to determine an estimate of the value of the home in question. The findings in an appraisal determine the amount a mortgage lender will loan a borrower for the property. In a real estate purchase, it protects the buyer from paying more than the house is worth. In a refinance, it disallows the lender giving the homeowner-borrower more than the home is worth.
Appraisal vs. Home Inspection
While both processes happen before you purchase the home, there are a few differences between an appraisal and an inspection. A home appraisal is required by the lender, while a home inspection is strongly recommended, it's not mandatory in the loan process. Therefore, you are responsible for finding a home inspector and scheduling the inspection. Your Realtor should make several recommendations for local home inspectors from which you can choose. Meanwhile, the lender will schedule your appraisal for you.
Another difference is in their purposes. An appraisal determines the home’s value, while an inspection determines its condition. And so, their processes are different. A home inspection concentrates on the functional parts of the home, both visually and using special equipment to find problems that may not be seen by the naked eye. An appraisal does a review of the home and concentrates on research of similar, recently sold homes in the area to determine value. These homes are known as comparables, or “comps.”
Who Appraises The Home?
Appraisals must be conducted by a licensed, neutral third-party appraiser with no connection to the buyer, seller or lender. The market value is therefore fair, unbiased and free of any influence from any party that could benefit. The lender usually orders the appraisal, but the borrower pays for it. The appraisal fee is an upfront, out-of-pocket expense that will not be refunded if either party fails to move forward with the sale.
How Much Does A Home Appraisal Cost?
Most appraisals cost $200 – $700. However, the cost of an appraisal depends on a few factors, including:
- The location of the home (time & travel)
- The size of the home
- The type of home
- The home’s location
- The condition of the property
- The amount of work and time required to perform the appraisal and prepare the report
These factors affect the amount of time, effort and work that go into the appraisal, which is what ultimately influences the price. For example, a larger home or mult-iunit property has more space to walk through and assess. A home that has unique characteristics makes it difficult to find comps because those features often make the home one of a kind. If the home is in a remote area with nothing around it, the appraiser may have difficulty finding any other home in the area, let alone ones that are similar to the home in question. This may require deeper research, which takes more time.
The Home Appraisal Process
Before the lender can order the appraisal, you will have an accepted Contract which will be sent to your lender. After that, the appraisal process can begin, starting with the lender ordering the appraisal.
Once ordered, an appraiser will inspect the home. He/she will inspect certain parts of the home for specific reasons based on the type of loan. They’ll inspect the home's features, ensure things like heat and electrical are working properly and that there are no safety issues. Certain loans, like FHA loans VA loans have more specific appraisal criteria than others since many of the issues they find during the appraisal must be completed before the buyer moves in.
The appraiser will then review comps to come up with the fair market value of the home and generate a report with a detailed description of the property, its condition and basic and unique features. General data on the market and the location of the home, the properties used as comps and information that supports the appraiser’s findings and final valuation. You may receive a copy of the report for your own records.
If the home appraises at or above the agreed purchase price, the loan will be processed as usual. But if lower than the agreed purchase price, more steps will need to be taken since the lender cannot lend more money than the home is worth.
What Do Appraisers Look For?
The appraiser’s job is to assign a total, fair market value to the property. In order to do this, they look for certain things that can affect the price or impact the lender’s decision to loan you money for the home.
- Health and safety hazards
- Structural integrity of the home
- The condition of the home
- Upgrades or improvements
- Visible defects
- Any conditions set by the lender
Here some things the appraiser looks at on the exterior of the home:
- Total land area or acreage of the property
- Condition of the roof and foundation
- Condition of the chimney
- Condition and type of driveway surface
- Home’s curb appeal
- Quality of the landscaping
- Condition of the pool, if there is one
- Type of garage
- Structural integrity
The appraiser looks at these things when they inspect the interior of the home:
- Amount of livable space
- Number of bathrooms and bedrooms
- Working HVAC system
- Type of basement or crawl space
- Built-in appliance upgrades
- Any lead or peeling paint, but only if the house was built prior to 1979
- Quality of the electrical and plumbing
- Material and conditions of the walls, floors and windows
- Evidence of termites or pests
- Energy-efficient features
- General upkeep of the home
- Permanent upgrades
FHA loans require repairs be completed prior to closing. This impacts both the buyer and the seller because the home loan process cannot move forward until repair items are completed.
- Exposed floorboards and wall studs to be secured
- Chipped or peeling paint, especially lead-based paint if built before 1979, must be scraped and painted
- Water damage must be addressed, including any plumbing, roof or foundation issues associated with the damage
- Holes in the roof or siding must be repaired
- Driveway or sidewalk damage must be corrected
- An outlet within 10 feet of a water source that has only a regular two-prong plug
- A grounded plug or a GFI outlet designed for bathrooms, kitchens, garages and anywhere outside where you need an electrical outlet must be installed
Similar to FHA appraisals, VA home appraisals have their own standards for acceptable home conditions. In addition to the standard, conditional loan appraisal requirements, VA home appraisals will require:
- Clean drinking water, a water heater and a sewage system
- Working electricity, heating and air conditioning
- Sound roofing
- Sound foundation
- Pest and termite inspection
- Appropriate living spaces, including the bedroom, living room and kitchen
Just like FHA or conventional home appraisal, any repairs or safety or health concerns will slow down and possibly put a halt to the home buying process until they are addressed by either the buyer or seller.
A home appraisal must be completed by a VA-certified appraiser, assigned by the Department of Veterans Affairs.
How Sellers Can Prepare
- Check your electric garage door opener to make sure it’s working
- Secure a handrail on steps or stairwells
- Secure second-floor doors with decks
- Secure a railing to any and all raised decks
- Ensure all utilities are functional with no safety issues
- Ensure water, electricity and air conditioning are functional
- Address any plumbing issues, roof leaks or stains
- Check for cracks in the walls, ceiling or foundation
- Check for water intrusion through the foundation
- Ensure your roof is sound and has at least 3 years of economic life remaining
Your Home’s Appearance
Curb appeal can impact a home’s value, and is considered in the appraisal. A well-kept home may have a positive effect on the appraiser’s opinion of the condition of the home.
- Mow your lawn, trim bushes, rake the leaves or shovel the pavement to create a clean – and safe – appearance.
- Plant new flowers, lay new mulch and touch up outside paint to quickly update the exterior.
- Add soft touches to the interior decor with blankets or plush throw pillows to add a hint of comfort.
- Declutter the home. Even if it doesn’t change the physical measurements of the home, decluttering can make a room feel bigger and more usable.
- Replace such hardware as drawer handles and doorknobs to add more shine.
- Set your thermostat to a comfortable temperature to increase comfort and showcase how the heating or cooling works.
- Remove any unpleasant odors, including garbage, items in the fridge, cooking, dirty laundry or pets.
- Clean the home to make sure the appraiser are seeing every feature in its best light.