In general, the goal of an appraisal is to provide an estimation of a property’s market value.
A home appraisal ought to be top of mind when you're looking to buy, sell or refinance a home. An appraisal determines for the seller, the buyer and the lender how much a home is worth.
The purpose is to protect the buyer and the lender from paying too much.
A home appraisal isn't the most glamorous part of buying or selling a home, but a key step. The following is some important information about the home appraisal process.
What Is a Home Appraisal?
When you have your home appraised, a professional visits the property and inspects both inside and out. However, though both processes involve someone looking around your property, an appraisal has a different objective from a home inspection.
During a home inspection, parts of the home are examined that are not typically minded on a daily basis, i.e., crawlspace, attic, cabinets, water tank, roof, etc. Inspectors also look at everything that is moving and mechanical – they look for safety issues to make sure the house is in sound shape. If anything is found to be damaged or in need of upgrades for safety reasons, the inspector will give you a list of what needs to be addressed.
The goal of an appraisal, on the other hand, is to come up with an estimated market value for a particular property. This is based on its characteristics and market conditions, according to Matt Harmon, a state-certified property appraiser and strategic real estate advisor at Real Estate Bees, "Appraisers seek to determine the fair market value that a typically motivated buyer would pay for a home."
After a visual inspection, the appraiser creates a report that explains how the value of the home was determined and what that estimated market value is. Though the value is ultimately the opinion of the appraiser, it is meant to be an unbiased, expert assessment.
Appraisals can be coordinated by either the buyer or seller. If you are planning to sell your home, getting an appraisal can help choose an appropriate listing price that will attract qualified buyers.
However, appraisals most typically take place during the mortgage approval process. The lender will order an appraisal to ensure that the home's value is in line with what you're planning to pay for it. Since the property serves as the loan collateral, the lender wants to be sure you borrowing the correct amount.
Lenders are unlikely to loan a requested amount if the property is not worth that amount, and in some cases mortgage applications may be denied.
Even though the lender requires an appraisal, the borrower is usually the one paying for it. Generally, home appraisals cost between $200 and $600, with the average cost about $350. Factors that affect the cost include the size of the home, its condition, the location, report detail required, and more.
Whether you order a home appraisal as a buyer or seller, scheduling as close to the sale date as possible, is recommended as market conditions can change dramatically – especially right now – over the course of even weeks.
How Do Appraisers Evaluate Market Value?
Most appraisers use the industry standard Fannie Mae Uniform Residential Appraisal Report to evaluate a property's condition, size and layout, as well as any desirable qualities or drawbacks. That can include square footage, number of bedrooms and bathrooms, overall condition, and health and safety issues.
Also observed are things about the surrounding areas – the land the home is on, types of homes in the immediate surrounding area, and any seemingly-negative features like loud roads, power lines, airport noise, etc.
An appraiser then moves into the analysis portion of the process, where all observed factors are carefully considered for a comparison step. The subject property is compared to other homes that have sold recently in the immediate area.
Comparable home sales (commonly known among appraisers as “comps”) are one of the most important factors in a home’s appraisal. Appraisers look for sales that occurred within 6-18 moths and within a mile of the subject property that have similar features such as age, size, and features. Appraisers usually want at least three comps to determine a good median price value of the home.
For example, if homes sold within the last year ranged in price from $250,000 to $280,000, the appraiser would start with this range in mind and then adjust up or down. If the subject property has a bigger yard or a remodeled kitchen, for instance, the appraiser may go with the higher end of that range.
Ultimately, the goal is to determine what sale price a buyer and seller would agree on at that given time. This process usually takes about a week, though timing depends on the time of year and complexity of the report.
How Does a Real Estate Agent Affect a Home Appraisal?
Home appraisers are independent professionals who do their best to come up with an objective property value based on data. That means other interested parties, such as real estate agents, should not have influence over the result.
While there is in fact separation between agents and appraisers, a real estate agent can assist in the process by providing detailed, expert knowledge of the property. An agent may meet with the appraiser to review recent home improvements and other such details. With expert, recent knowledge of neighborhoods, the agent can also point the appraiser toward other comps in the surrounding area.
Can You Improve Your Home Appraisal?
In the case of refinancing a mortgage, it’s best to get as high of an appraisal as possible. Quite possibly, in today’s market, subject properties will have higher that historical values with no changes made to the property. In the event that sales prices go down, the value of the subject property will go down too (based on comparable home sales).
Some of the ways an owner/seller can ensure their property is appraised higher are as follows:
- Curb appeal counts! Mow the lawn, pull the weeds, trim the hedges.
- Fresh paint and carpet, updated (not entirely remodeled) kitchen and bathrooms tend to provide the greatest return on investment.
- Prepare a list of recent home improvements. Note things like new roof or siding, upgraded furnace, etc. Additional efforts like these can help support a higher appraisal.