Home Appraisals: What You Should Know
Many legal and financial transactions involving a home require an objective judgment of just how much that home is worth. That analysis is usually put in the hands of a licensed appraiser. A home appraisal is a relatively straightforward process, but it’s good to be prepared and know your options if you are unhappy with the result.
- What is a home appraisal?
- Reasons for getting an appraisal
- The payment process
- Appraisal vs. home inspection
- Disputing an appraisal
What is a home appraisal?
A home appraisal is an unbiased opinion of value on a home. A licensed appraiser will use information about the individual home, property and neighborhood, along with comparable recent sales in the area, to arrive at a value.
The appraiser will usually come to the house and look at the interior and exterior. Their goal is to evaluate the design, features and condition. Jennifer Bossuot, a licensed appraiser at Humes Realty and Appraisal Services, said homeowners should expect the appraiser to take photos and to ask lots of questions. Questions may involve asking about updates that have been made in the past five to 10 years, how old appliances are and when owners last updated the roof. The nature and thoroughness of the home visit depends on what sort of appraisal is taking place.
The appraiser then heads back to the office to do additional research on the area, including market conditions, available listings, leases and sales of similar homes. They will look for “comparables” or “comps,” nearby homes of similar age, features and quality that are either on the market or were recently sold. The appraiser takes all this information into account before producing the final report and valuation.
To prepare for a home valuation, the National Association of Realtors recommends you gather an “appraiser’s package,” consisting of “plats, surveys, deeds, covenants, HOA documents, floor plans, specifications, inspection reports, neighborhood details, recent similar quality comparables, detailed list and dates of upgrades, remodels and costs and energy-efficient green features.”
With government-insured loans, like FHA or VA, the appraiser is required to note the condition of safety items, like smoke and carbon monoxide detectors, peeling paint and handrails. Christine J. DelVecchio, president of the New York State Association of Realtors, recommends if the home is being bought with an FHA or VA loan, the sellers should make sure such items are in place before the appraiser comes. If not, the bank may require that any safety issues be resolved before the loan is issued, which can stall a sale as the buyer and seller negotiate over how repairs are done and who is paying for them.
Reasons for getting an appraisal
An appraisal is a useful tool anytime someone wants a fair judgment of a home’s value.
Mortgage approval. One of the most common reasons to have an appraisal is to purchase a home. If the buyer is getting a mortgage, the lender will normally require an appraisal as a way to objectively judge if the purchase price is appropriate, and to figure out the loan-to-value ratio.
“The bank wants to make sure that the price the buyer has agreed to pay the seller is in the range of market value,” said DelVecchio. This kind of an appraisal takes place after the buyer and seller agree on an offer but before the lender approves the mortgage. If the home appraises for less than the agreed upon purchase price, the lender will either deny the loan application or require the buyer to make up the difference in cash. At this point, a homebuyer could use a lower appraisal to try to negotiate for a lower purchase price with the seller.
Even when the purchase is all cash, the buyer may include a contingency that the home appraisal must meet the purchase price. DelVecchio said such conditions are more common now because of the steady appreciation of homes.
Pre-listing assessment. Sometimes sellers will get a “pre-listing appraisal” before they put a home on the market to help them gauge the proper value and set the listing price. Bossuot recommended this, especially if you have a “unique property or if you completed a lot of updates or improvements on the home since the last appraisal,” she said. DelVecchio agreed, saying it makes sense for a specialty property like a bed-and-breakfast or horse ranch. She also recommended such an assessment when there is a dearth of local market information available. “As a Realtor, if I am having trouble finding recent comparable sales to use in my pricing analysis, I might recommend the seller to hire an appraiser,” she said.
Home equity loan. When applying for a home equity loan, appraisal requirements vary by lender. An appraisal helps the lender determine how much equity in the home is available for borrowing, but some lenders will accept an automated valuation of the home or a cheaper “drive-by” appraisal instead of a full appraisal report.
Refinancing. In the cases of refinancing, an appraisal is not always required, but most private financial institutions will want one. The “streamline” refinance process from the VA or FHA does not require a new appraisal.
An appraisal allows both parties to objectively value a home in divorce proceedings. Sometimes the divorcing parties agree to hire one neutral appraiser and split the costs. At other times, they will hire two seperate appraisers and submit their reports to the judge.
Settling an estate
An appraisal provides a fair market value to use when dividing up an estate. It may also be needed to help determine state, federal and local tax obligations.
Fighting a tax assessment
When homeowners want to dispute the pricing opinion of a tax authority, they often choose to order a formal appraisal report. They can use this as part of the official grievance process, and to provide evidence for their argument that the tax assessment is wrong.
The payment process
Appraisals typically cost from $300 to $400, but the exact price varies depending on the state and the type property, and might be even higher. In the case of VA home loans, there is a standard appraisal fee table available online. For example, an appraiser hired by VA to value a single family home in Connecticut gets $450, but $750 in Colorado. Bossuot explained the pricing state by state depends on the availability of licensed appraisers.
If the appraisal is for a home mortgage, the lender will arrange the appraisal and, usually charge the buyer a home appraisal fee. Since 2010, federal regulation has prohibited mortgage providers from arranging valuations from any person who has “an interest, financial or otherwise, in the property or the transaction.” As a result, most lenders now use a middleman called an appraisal management company (AMC) to find and hire the appraiser. This process is designed to prevent the lender from having any influence on the appraiser’s final valuation. The AMC will charge the lender, who will then pass those charges on to the buyer.
With refinancing, if an appraisal is necessary, the lender would arrange it and then charge the cost to the owner. The homeowner pays for the appraisal in most other cases, like a presale assessment, disputation of a tax case, divorce, etc.
Appraisal vs. home inspection
While there might be some commonalities between a home appraisal and a home inspection, they are not the same thing.
The appraiser is making a general assessment of the quality and conditions of your home and property, and then combining that with research of comparable sales to arrive at a fair valuation.
The home inspector is digging much deeper into the nuts and bolts of your house, looking at the plumbing and electrical systems, and searching for any overall defects. The inspector doesn’t care at all about market conditions or similar sales in the area.
Disputing an appraisal
What to do you do if an appraisal comes in higher or lower than you were expecting?
In cases involving financing, the first thing to do if you disagree with the valuation of the home is to contact your lender. When a financial institution orders the appraisal, it is technically the client, not the buyer. The appraiser is required to discuss the results only with the client.
In non-lending cases, like divorces or tax disputes, you are the client. You can communicate directly with the appraiser.
In either case, check the appraisal thoroughly for any errors about the property. Then, explain in writing why you are disputing the assessment. For example, if the assessor missed a major feature of the home or if they left off a recent comparable sale. It’s important to provide any evidence you have that disputes the findings, Bossuot said.
The appraiser will then review the submission and either decide whether to update their assessment or not.
If this initial dialogue has taken place and you still don’t agree with the value, you do have a few options. According to The Appraisal Foundation, an organization which sets the national standards for the industry, you can request that your lender order an appraisal review assignment or order a second appraisal, but the lender is not required to do so. In an appraisal review, a different appraiser checks the work of the first, and if the reviewer disagrees, he or she can provide a different opinion of the home’s value.
You can also dispute whether the appraiser is really a local market expert, DelVecchio said. This is a requirement, since appraisers must understand the nuance of local conditions. DelVecchio said, for example, in the Southern Tier, N.Y. real estate market where she works average prices vary by almost $100,000 between two areas that are just 30 minutes apart.
“The pricing of homes in and around that border can be tricky when you have an out-of-the-market appraiser,” she said.
The VA has a very specific process, known as “Tidewater Initiative” for reviewing appraisals that appear likely to come in under the sales price. If it looks like the valuation will not support the sales price, the appraiser notifies a point of contact (usually the loan officer or Realtor) before the final report is issued. The contact person then has two days to submit additional information, including proof of comparable sales, for the appraiser to consider.
The bottom line
An appraisal is a useful tool to help homeowners and homebuyers evaluate the worth of a property. The process is not difficult to follow, but it’s important to review the final report and estimate. If you don’t agree with the appraisal result, do your research, and prepare a written list of objections and supporting evidence.