How Home Appraisals Work

A home appraisal is a value analysis of your property from a certified or licensed appraiser hired by the lender during the home purchase or refinance process.

The lender needs an accurate appraisal of the property because it is providing a mortgage loan and wants to make sure it isn’t giving too much money to the buyer. The appraisal is also important to the buyer and seller because an appraisal value that comes in lower than the agreed-upon price could prompt a buyer to reopen price negotiations.

An appraiser typically evaluates the property—exterior and/or interior—conducts research and addresses any special requests from the lender.

A buyer can pay the cost of the appraisal if the lender or mortgage broker doesn’t pick up the tab. They are usually several hundred dollars.

The appraisal takes place as early as possible after the two parties agree on a price, to allow enough time to schedule a property visit and production of the report. A lender will select a home appraiser who will contact the seller to set a time and date for a home visit.

A uniform residential appraisal report usually relies on these factors:

An appraisal inspection. Traditionally, appraisers review both the exterior and interior of a home to make sure it is in good structural shape, to confirm there are no safety issues, to make note of the number of rooms and to see if there have been major upgrades since the last real estate transaction. The appraiser usually takes photos of the various parts of the home during the walk-through. The appraiser handles the home visit individually, but homeowners might be present, especially if they are still living in the home. Buyers can request to be present, although it’s not common.

Research. An important part of the appraiser’s value determination is the price of comparable homes sold recently in the property market. The most relevant ones have many of the same characteristics as the home in question and are in the neighbourhood or one nearby.

To get comparative information, appraisers typically review government records as well as home sale information from the Multiple Listing Service (MLS). MLS is a real estate database that includes home listing and sales information posted by real estate professionals. Although the database is technically private, much of the information is available online for free.

Valuation approach. The appraiser could decide that the sales comparison approach is the most appropriate way to assess value or could take a cost-based approach, which is an estimate of what the cost would be to build the home today combined with the value of the land.

Home appraisals are different from home inspections because they are conducted to determine the value of a home for the benefit of the lender. Home inspections are focused on the buyer’s interests and the home repairs needed before completing the purchase.

During the closing process, the buyer will find and hire a home inspector, who will conduct a thorough review of each part of the home, develop a detailed report covering the interior and exterior and make recommendations about what might need to be fixed or updated. The purchase of the home maybe subject to a home inspection according to the buyer, which means the seller needs to get a home inspection in order for the sale to go through. In this case, the seller may pay for the home inspection to expedite satisfying the conditions and meet their obligations so the transaction doesn’t become null and void.

After the home inspection, it is up to the buyer and the buyer’s real estate agent to bring up any concerns found during the home inspection. Repairs could be made or paid for by the seller, or the two sides could negotiate compensation for the buyer to fix any issues after move-in. The home inspection does not involve lenders at all, unless the buyer decides to cancel the sales contract because of the results of the inspection.

When you get your home appraisal report, you’ll likely jump to the page that includes the final appraisal value. If the value is the same or very close to the proposed sales price, there shouldn’t be any complications with the loan. However, appraisal issues can be responsible for home purchase closing delays and terminated contracts.

The report will include:

• The value, including the definition of value—such as market value—and its effective date (the appraisal is usually good for four months)
• Characteristics of the property, including its features and condition
• Background on the market, the home location and the information—including comparable property—that back up the appraiser’s value determination
• Special instructions from the lender or other related agencies

The report is usually sent to the buyer when the lender gets it, at least three days before the closing date.

How to Challenge a Home Appraisal Report

If you feel you received a low appraisal and want to challenge the conclusions in the report, you can contact the lender. It’s best to send the information in writing, and it’s possible a revised appraisal could be ordered.

Issues to look for include:

• An incorrect number of rooms and failing to account for major parts of the home, such as a garage.
• Square footage listed that doesn’t resemble the actual size.
• Comparable sales that aren’t located near the home or that were completed many months ago.
• Major upgrades that were ignored in the report.

If you choose to get a second appraisal, it can’t be used by the lender as the proof of the home’s value, but it can help make your case against the original appraisal.

An appraisal is designed to satisfy a mortgage lender, but it can protect—or even be beneficial to—buyers, too. An appraisal can:

Confirm the home’s value. This is the usual result of an appraisal. Studies have shown the vast majority of appraisals support the purchase price. In this scenario, a buyer and seller can continue with the closing process at the anticipated pace.

Give buyers more bargaining power. A low appraisal would slow down the purchase process. Both the buyer and seller are notified of the lower property value, and it could give the buyer a chance to renegotiate with the seller. Or, the buyer could walk away from the deal because the home’s value doesn’t reflect the proposed purchase price. Buyers who want the property badly enough could shrug off the lower appraisal and pay the seller the difference between the sale price and the appraisal value out of their own pocket.

Boost home equity. A much higher appraisal gives the buyer more home equity, which is a huge advantage if someone wants to avoid mortgage insurance and get a home equity loan or line of credit down the road. Also, the seller won’t be aware of the estimate, so there will be no need to renegotiate.

If you’re selling your home, you’ve probably done a lot of work to make it look as good as it can, both inside and out. You’re not likely to make major changes in the short period of time between the sale agreement and the home appraisal process.

But you can do some basic cleaning and upkeep to ensure the home is still in top shape for the appraisal visit. You’ll want to:

• Make sure important mechanical devices connected with the home are working, such as the electric garage door opener.
• Ensure there are no obvious repairs needed, especially ones—such as faulty railings or steps—that could cause a safety issue.
• Clean up or address problems with the roof and windows or repair water leaks and other issues that could imply there are active problems within the home.
• Conduct basic cleanup inside and outside the house, so it looks as good as possible.

Home sellers can possibly increase the value of their home appraisal by giving the property appraiser information about notable property improvements, including a new roof, updated siding, recently purchased furnace or air conditioner unit or an addition.

You’re at risk of lowering the appraised value of your home if you let clutter take over, don’t address safety issues and have an unkempt front of the home that limits curb appeal. Also, keep track of sales in your neighbourhood, as a cluster of distressed sales in which owners didn’t get market value for their homes could negatively affect your appraisal.

Homeowners who are refinancing need to make sure the appraised value hasn’t slipped since they bought the home. Their current mortgage is based on that previous value, so a decrease could possibly make the bid for a new mortgage more complicated or not possible.

For example, if you bought a home for $300,000 two years ago and it’s now valued at $290,000, it will cut the equity you have in your home. The new loan-to-value figure might affect your interest rate and whether you need to get mortgage insurance.

Homeowners also need to emphasize any recent upgrades, which can directly show that the home has maintained or increased its value.

Related: How To Get A House Appraisal