Home Appraisal: How It Works & How Much It Costs

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The home appraisal is a big part of the home buying process, especially if you need a mortgage loan. Lenders require appraisals to ensure the home is worth enough money to lend to investors to purchase the home. Since investment properties are riskier for lenders, they use the expertise of a licensed appraiser to determine the home’s value.

Home appraisals may feel like another obstacle to investing in properties. Still, they help you make the right decision about investing in real estate and ensure you’re making a good investment.

What Is a Home Appraisal?

A home appraisal is a determination of a home’s market value. Mortgage lenders require home appraisals to ensure the purchase price you’ve agreed to pay for the house is fair compared to other homes in the area. The appraiser will provide lenders with a Uniform Residential Appraisal Report to show the home’s value. This is a standard report that all lenders use during the underwriting process.

Home appraisals are necessary when buying, selling, or refinancing a home, helping everyone involved understand the home’s value and, in the case of refinancing homeowners, the amount of equity a homeowner has in the property. The more equity a property has, the more you can borrow for other purposes, such as home improvements or a down payment on another property.

The home appraisal tells everyone the home’s fair market value or how much it would sell for if you were to sell it then.

Types of Home Appraisals

There are several types of home appraisals a mortgage lender may order. The type a lender requires depends on the transaction you’re conducting and the factors of the financing situation. Most lenders require a traditional appraisal, which takes the longest and has the highest home appraisal cost. Some lenders allow other options, especially if you’re a repeat borrower or have excellent credit and a lot of equity.

Traditional appraisal

A traditional appraisal is the most common type that mortgage lenders require. In this type of appraisal, an appraiser visits the home in person. He evaluates the home’s interior and exterior and takes pictures and measurements of each room and outdoor area. The appraiser may also note specific features or upgrades the home has or any issues he finds with the house that could decrease its value.

The seller can be present for the home appraisal, but it’s not required. Rarely is the buyer present, but you can always ask the appraiser if you would like to be present.

Desktop appraisal

In some situations, lenders may offer desktop appraisals. This means the appraiser doesn’t visit the property. Instead, they use publicly available data, such as floor plans, tax records, and data from comparable sales, to determine a home’s value.

Desktop appraisals are increasing in popularity because they can be completed faster, allowing lenders to close loans quicker. However, some lenders don’t accept them, so always ask if that’s something you want to use.

Hybrid appraisal

The hybrid appraisal is a combination of traditional and desktop appraisals. With this option, the appraiser doesn’t visit the home but relies on information from a third-party appraiser or another professional who can provide interior and exterior photos, measurements, and other data to help the appraiser determine the appraised value.

What Is the Home Appraisal Process?

Most mortgage lenders order appraisals when you apply for a mortgage and are either buying or refinancing a house.

An appraiser must be licensed or certified, as required in their state. The appraiser must also be a neutral third party with no interest in the property on the buyer or seller’s side.

The appraisal usually takes place soon after the buyer signs the sales contract or when a homeowner applies to refinance because the appraisal process can take a few weeks. The loan amount and approval depend on it, so it can hold up loan underwriting.

Evaluation

When an appraiser visits the subject property, they walk through the home’s interior, count the rooms, and take measurements and pictures. They ensure the home is in good condition and has no safety issues.

Appraisers may ask the homeowner questions about any recent upgrades to the home or any other information they need to come up with the fair market value. They also walk the home’s perimeter, taking pictures of its exterior and ensuring it is in good condition outside. They look specifically at things like windows and roofing that could decrease the value if they aren’t in good condition.

Market research

To determine the appraisal value, an appraiser must compare the subject property to comparable homes. Ideally, they are homes sold within the last six months and located near the subject property.

Any comparable property the appraiser chooses should have similar features to the subject home and be in the same neighborhood. If the appraiser cannot find homes nearby, they can expand the distance, which could affect the home’s value.

Valuation

Most appraisers use the sales comparison method to determine a home’s value, but if there aren’t enough comparable sales, they may use the cost-based approach. This method takes more time and research from the appraiser because they must determine how much it would cost to build the exact home with the same features today. This may also increase the appraisal fees.

What Does an Appraisal Report Include?

The appraisal report is what lenders wait for during the underwriting process. The report tells them the home’s appraised value and important information about its condition.

The appraisal report will state the home’s value, the expiration date of the value, and the home’s characteristics. The appraisal report will also include information about the comparable properties, including their features, condition, and sales price, to back up the value the appraiser determines is fair for the home.

The appraisal may also include notes about the home’s condition, especially any problem areas noted by the appraiser, if it would affect the lender’s interest.

Where do appraisers focus?

You might wonder how a real estate appraiser determines the value. It might surprise you to know where home appraisers put most of their focus.

  • Home’s living condition: Home appraisers look at a home’s function and overall condition, but not the little stuff. They won’t turn on sinks and showers or check for mold in the crawl space. Instead, they count bedrooms and check for safety issues, giving an overall report of the home’s condition.
  • Home improvements: If the home has significant improvements, the appraiser may include them in the appraised value. They only include permanent improvements that greatly affect the home’s functioning and will remain in the home when the seller moves.
  • Comparable sales: The subject home is a big part of the appraisal process, but comparable sales matter too. For example, if there were a lot of foreclosures in the area recently, it could decrease a home’s value, but if many homes sold for a higher price recently, it could work to your benefit.

Why Do Lenders Require Home Appraisals?

Lenders require home appraisals to ensure there is enough collateral in the property. For example, if you offer $500,000 for a property, but the house appraisal shows that it’s only worth $400,000, it’s not a good investment for a mortgage lender or yourself.

The home appraisal also tells lenders about the home’s condition. If there are many major issues, such as significant neglect or severe safety issues, that could affect the home’s value.

How Much Does an Appraisal Cost?

The property’s location, size, and complexity of the appraisal affect the home appraisal cost, but on average, they can run $500 or more. If you purchase a single-family property, you’ll likely pay an average of $500, but if you invest in multifamily properties, the appraisal fees usually increase with each unit.

Despite the appraisal being a required part of the home lending process, the buyer pays for the appraisal. Buyers typically pay for it at the time of the appraisal, but some lenders allow you to pay for it with the other closing costs.

How Long Does It Take To Do an Appraisal?

From start to finish, the home appraisal process can take several weeks as it depends on multiple factors, including getting access to the home. The sooner the seller lets the appraiser see the home, the faster they can complete the process.

However, because there is a lot of research and calculations involved, it’s typical for the process to take 2 to 3 weeks, which is why most mortgage lenders order the appraisal immediately after receiving the sales contract.

Homebuyers and Appraisals, What You Must Know

The home appraisal affects everyone involved in the process, but especially homebuyers. Typically, a home appraisal helps buyers, but sometimes it can hurt.

How appraisals help homebuyers

  • Confirm your purchase price: No one likes paying more than necessary for a property. A real estate appraiser can confirm the value of a home so you know you’re paying a fair price for it. When the home appraiser determines the home’s value is equal to or greater than your purchase price, you know it’s a good investment.
  • Prevents bad investments: A low appraisal can save you, even though it may not feel like it at the time. Investing in a home that costs more money than it’s worth is like throwing money out the window. While you’ll spend money on the appraisal, at least you won’t waste hundreds of thousands of dollars on a bad investment.
  • Can be a negotiating tool: If the appraisal value comes in low, you can negotiate with the seller to lower the sales price, saving you money and preventing a bad investment.

What can go wrong with appraisals?

Home appraisals aren’t based on opinion, but there are times when lenders or homebuyers don’t agree with the appraisal value of a home. Mistakes happen, and it can affect your real estate transaction if you don’t fix it.

If you don’t feel an appraisal report is accurate, you can request a second appraisal or request a reconsideration of value. If you ask for this, be sure you have enough evidence to prove that the home deserves a higher appraisal. Any factual evidence you can provide may help your case.

Often investors feel that the home appraiser didn’t use appropriate comparable sales when determining the home’s value. That’s why requesting a second appraisal can help you get the value you need for the home, even though you’ll pay the appraisal cost twice.

Appraisal Tips for Home Sellers

Home appraisals affect home sellers too. You could lose the sale if you can’t sell your home for enough money because the home appraisal report doesn’t match the sales price you agreed to with the buyer.

So how do you ensure you get the high appraisal value you want? Here are 6 tips:

  1. Check all home mechanics: Check the HVAC, plumbing, and electrical systems to ensure everything is in good condition. If it’s been a while since you’ve had the systems serviced, consider having them checked professionally to ensure they are in good condition and aren’t on the verge of breaking down.
  2. Take care of any repairs: Now’s the time to take care of the ‘honey do’ list you neglected over the last few months or years. Look in all areas that might get overlooked, and always take care of any safety issues, as those are always red flags on appraisal reports.
  3. Make small cosmetic upgrades: Consider things like a fresh coat of paint, updating fixtures, or removing wallpaper before listing a home for sale. Don’t mess with large renovations right before selling a home because chances are you won’t see a return on your investment. But small upgrades can have a significant impact on the property’s value.
  4. Have a list of your upgrades and improvements: If you’ve made any improvements to the home since the last real estate transaction, provide proof of the changes. This includes contractor invoices or other official paperwork to document the cost of the upgrades and the work completed.
  5. Increase the home’s curb appeal: Make sure the home looks great from the outside. Clean up the lawn and landscaping and handle any issues like leaky gutters, missing shingles, or broken windows. Add pots of flowers and little personal touches throughout the home’s exterior to make it look appealing.
  6. Keep it clean: Keeping the home clean is the key to a high appraisal value. The appraiser must be able to walk around the home and take measurements and pictures easily. The easier it is for the appraiser to see the home, the more accurate the estimated value will be.

Do Refinancing Homeowners Need an Appraisal?

Most mortgage lenders require a home appraisal whether you’re buying or refinancing a home. However, depending on your qualifying factors, you may be able to get by with a drive-by or hybrid appraisal. If you recently did upgrades to the home, though, you may want to request a full appraisal to ensure you get a fair market value, especially if you need the home equity to refinance the home.

Is a Home Appraisal the Same as a Home Inspection?

A home appraisal and home inspection may seem similar, but they have many differences. As we said, the appraisal looks at the home’s overall value and condition. It’s not the appraiser’s job to find everything wrong with the home; they must only find the issues affecting the home’s value or the lender’s investment.

A home inspection is a more in-depth evaluation of the home. The inspector looks for specific areas of concern, such as leaky pipes, mold growth, an old roof, or other concerns. Lenders don’t require home inspections; the inspection report won’t affect a home’s value or the mortgage approval. However, buyers may re-negotiate with sellers if the inspector finds major issues in the home.

Final Thoughts: Home Appraisal Process

A home appraisal is important for any real estate transaction. Whether you’re using a real estate agent or buying the home yourself, the appraisal ensures you’re making a good investment. A low appraisal may feel bad when you’re excited about investing in a home, but it could save you hundreds of thousands of dollars in a bad investment.

Whether you’re making a home purchase or refinancing an existing property you own to use the home equity to expand your real estate portfolio, the appraisal fee will be the best money you spend as a real estate investor.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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