Whether you’re buying, selling, or refinancing a home, you’ll likely need a home appraisal. The appraisal plays an important role in establishing a property’s value, which affects everything from setting a sales price or getting financing approved to how much you can borrow with a cash-out refinance.
Here’s what you should know about how appraisals work and what to expect from a home appraisal:
- What Is a Home Appraisal?
- Reasons To Get a Home Appraisal
- Who Conducts an Appraisal?
- Tips for Preparing For an Appraisal
- What an Appraiser Looks For
- How Appraisals Are Calculated
- How Long Do Appraisals Take?
- How Much Do Appraisals Cost?
- Understanding the Results of an Appraisal
- What Can Go Wrong With a Home Appraisal?
- Disputing the Appraisal Results
- Home Appraisal FAQ
- The Bottom Line on Home Appraisals
What Is a Home Appraisal?
A home appraisal is a written report from a licensed home appraiser. The report summarizes a property’s key features, such as its size, location, condition, and amenities. The report also offers an opinion as to what the property could sell for on the open market.
So, how does a home appraisal work? The estimated value is based on the property itself and factors such as proximity to schools, transportation, parks, and medical care. It also considers recent sales of comparable homes nearby — usually called “comps” — as indicators of current market conditions.
Types of appraisals
There are three types of home appraisals. Which one you need depends on the reason for the appraisal:
- Full appraisal: A full appraisal is an interior and exterior inspection and report, typically used when a home is being bought, sold, or refinanced. The appraiser researches comps and factors in public and private data to estimate the value of the home. This is the most comprehensive and common type of appraisal.
- Exterior-only appraisal: As the name implies, this type of appraisal involves inspecting only the outside of a property. Appraisers still consider comps, as well as public and private data. Also known as drive-by appraisals, exterior-only appraisals typically are used when homeowners are seeking a home equity loan or line of credit.
- Rental analysis: A rental analysis is an addendum to an existing home appraisal, and is created for investment properties that will be rented out. This report considers the property’s structure and location to determine fair market rent.
Home appraisal vs. home inspection
Both the home appraisal and home inspection involve a thorough examination of the home, but they serve different purposes. The home appraisal is focused on determining the current market value of the property, while the home inspection is about evaluating the home’s condition.
The appraisal helps protect the buyer from overpaying and confirms to the mortgage lender that the loan amount is appropriate. As a result, lenders typically require home appraisals.
The home inspection gives buyers a detailed look at the current state of the property they will be investing in, and protects them from inheriting unexpected and expensive issues. Home inspections aren’t required, but they are strongly advised.
Reasons To Get a Home Appraisal
When you’re buying, selling, or refinancing, there are reasons why it’s important to know what a home is worth:
- If you’re buying a home, your lender will use the appraisal to decide how much it will lend to you. The appraisal also shows if you would be overpaying, and allows you to make an informed decision on whether to buy at all.
- If you’re selling a home, the home appraisal will estimate a fair price for your home in current market conditions.
- If you’re refinancing a home, your lender may require you to update your appraisal. This is key if you’re looking to establish how much home equity you have. Equity affects how much you can borrow with a cash-out refinance, and may result in or remove the need to pay for private mortgage insurance.
Additionally, a new home appraisal may be important if you need to assess a property for tax purposes, or determine the value of your assets for estate planning or as part of a divorce settlement.
Who Conducts an Appraisal?
A home appraisal is conducted by an independent appraiser. In addition to following federal requirements, appraisers typically are required to be licensed or certified in the state where the property they’re inspecting is located. Appraisers may hold additional credentials from — or be members of — a professional organization, such as the Appraisal Institute.
How to choose an appraiser
If you’re buying or refinancing, your lender will order the appraisal and choose the appraiser.
One exception to this is if you want your own appraisal prior to refinancing. This can help you gauge how much your home is worth, and how much equity you have in your home.
You also may want to hire your own appraiser if you disagree with the results of the appraisal that your lender ordered.
If you’re a seller, you don’t need an appraisal for lending purposes. However, if you want to know how much your home is worth before putting it on the market, you can order your own report.
When choosing an appraiser, you can start with the directories offered by the Department of Housing and Urban Development or the licensing authorities in your state.
Tips for Preparing For an Appraisal
How you prepare for a home appraisal depends on which side of the transaction you’re on.
If you’re buying
When you’re purchasing a home, your primary duty is to pay the appraisal fee, which will be processed through your lender.
With that said, you can insist that the lender choose a qualified and independent appraiser. This could mean asking your lender if the appraiser is affiliated with the bank, and about their qualifications and experience. You also may be allowed to be present while the appraiser is inspecting the property.
If you’re selling
Preparing for the appraisal may involve making improvements or repairs around the home. The appearance of the property and its upkeep will greatly influence the results of an appraisal.
“Generally, the physical appearance, condition and functional utility of the improvements can have a significant impact on appraisal results,” says Ken Dicks, director of appraisal compliance for Reggora, a lender-to-appraiser platform based in Boston, and a designated member of the Appraisal Institute. “Properties that are not adequately maintained to the local market standard will generally underperform.”
If you’re refinancing
If you’re refinancing your home, preparing the property for an appraisal can be just as important as when you’re selling. You may want to make small updates or repairs around the home, and ensure a pleasant physical appearance with landscaping. If your home doesn’t appear to be well maintained or updated, or has significant issues, you may find that the appraisal is lower than you anticipated.
What an Appraiser Looks For
There are important physical features that an appraiser will look for and consider in their report. This involves inspecting, measuring, and photographing the interior and exterior of the property. According to Domenick Neglia, a strategic real estate advisor at Neglia Appraisals in Staten Island, New York, this process is very personalized.
“The appraiser should measure the house from the outside and should carefully inspect the entire interior and exterior,” Neglia says. “He will look for components that have been recently modernized, as well as what is called deferred maintenance — items that need repair or have been neglected.”
Certain upgrades may pay off in the home appraisal process, too.
“Are the kitchen cabinets builder-grade, or are they customized?” he says. “And are the appliances basic brands or high-end?”
What Home Appraisers Look For
|Outside of the Home||Inside of the Home|
|Where the property is located, i.e., the character of the neighborhood, nearby amenities, schools, type of street, etc.||The size and layout of the home, including the number of bedrooms and bathrooms.|
|The size and physical condition of the property.||Updates to the home or renovations.|
|The age of the home and what materials it’s made of.||The quality of interior amenities, such as kitchen and bathroom features, a sunroom, a deck, or a pool.|
|The integrity of major structures, such as the roof, the foundation, or the chimney.||The condition of the plumbing, electric, heating, and cooling systems.|
How Appraisals Are Calculated
After the inspection, the appraiser researches public and private data to reach an informed decision about the property’s value.
What helps an appraisal?
- An updated and well-maintained home generally will appraise for more than a poorly kept or outdated property.
- Market activity and perception can improve a home appraisal. If the home is selling in an area where demand is high and availability is limited, the appraised value can increase.
- Location plays an important role. Specific neighborhoods may be more desirable to buyers than others, leading to higher appraisals.
What harms an appraisal?
- An oversaturated market can hurt appraisals. If homes are slow to sell or there are too many available properties compared to demand, property values typically drop.
- A home that’s visibly not maintained can expect a lower home appraisal value than if it’s well cared for.
- Overimproving a home can result in an appraised value that doesn’t reflect the homeowner’s investment in the property. Appraisers set values that are in line with the local market, so certain improvements may be out of line with the area.
How Long Do Appraisals Take?
The length of time it takes to complete a home appraisal depends on the size, complexity, and layout of the property. The larger and more difficult the home is to inspect and measure, the longer you can expect the appraisal to take. With that said, the average home appraisal is fairly quick.
“The on-site viewing and data collection process at the property can take up to an hour, depending on the size and complexity of the property,” Dicks says. “However, the entire appraisal process — that is the gathering of all required data, completing the analysis, and reporting the results — can take up to a couple of weeks.”
A home appraisal usually is conducted after the buyer and seller sign a purchase agreement, which is a contract for the sale of the home. The actual home appraisal timeline can vary, according to the appraiser’s availability and the lender’s schedule. But the final home appraisal report must be provided to the buyer no less than three days before the closing date.
How Much Do Appraisals Cost?
Expect your cost for a house appraisal to be determined by the specifics of your property, and the time required to research and write the report.
“The cost of your appraisal will depend upon the relative complexity and uniqueness of your property,” says Patrick Brown, chief appraiser at Valutrust Solutions, which provides national appraisal management services, in Overland Park, Kansas.
For instance, you can typically expect to pay less for an exterior-only appraisal. And the larger or more complex your home is, the more you’ll pay for your appraisal cost.
“Typical fees for a noncomplex property … will range from $350 to $750, depending on geographic location,” Brown says. “Complex properties can command fees greater than $1,000.”
Who pays for the appraisal?
Although the home appraisal benefits both the buyer and the lender, the buyer typically pays this fee either upfront or as part of their closing costs. However, if the seller is in a rush to sell their house and close the deal, they may offer to cover the appraisal fee to sweeten the deal.
Understanding the Results of an Appraisal
Once you receive the results of your home appraisal, you’ll want to examine the details. The report usually will include photographs of the property, and notes on each factor involved in the valuation.
It’s important to remember that an appraisal reflects the appraiser’s opinion of the home’s value. While the appraiser is a licensed professional, home appraisals aren’t an exact science.
So, what if you received a higher — or lower — appraised value than expected?
If you’re buying
If you’re buying a home that appraises for less than anticipated, you may want to return to the negotiation table with the seller. The appraisal can support your argument for a lower purchase price, though sellers aren’t obligated to adjust the price. Additionally, your lender may reduce how much it will allow you to borrow. If you still plan on buying the home, you may need to come up with a larger down payment to cover the gap.
However, if the property appraises for more than you’re buying it for, consider yourself lucky: You’re getting a deal on the home, and you’ll start out with more equity than expected.
If you have a contingency clause in your purchase agreement, any issues with the appraisal could allow you to back out of the home purchase. There often are time limits on such contingencies, so you’ll want to schedule your appraisal as quickly as possible after signing the purchase agreement.
If you’re selling
A lower-than-anticipated home appraisal can derail a sale or force you to lower your asking price. The buyer may try to renegotiate, and while you don’t have to agree to a new price, you risk losing the sale if there’s a contingency clause in your agreement. Additionally, the buyer’s mortgage lender could back out or require a larger down payment, which the buyer might not be able to make — causing the deal to fall apart.
If your home appraises for more than anticipated, you can use this as a reference point when listing your property for sale. However, you can’t raise the price if you’re already under contract with a buyer.
If you’re refinancing
The home appraisal value plays a key part in the refinancing process.
For instance, if your home appraises for less than you anticipated, you may want to wait to refinance until you have more equity.
If it appraises at a higher value, it could make sense to borrow some of your equity with a cash-out refinance or home equity loan to pay for renovations or other major expenses. If your home has increased in value, you might be able to refinance with enough equity to stop paying for PMI.
What Can Go Wrong With a Home Appraisal?
If the appraisal comes in lower than the purchase price, then your lender might not let you borrow enough to cover the cost of buying the home. This means you’ll need to pay for the difference in cash, ask the seller to lower their price, or challenge the appraisal. You’ll also have the option to walk away from the deal entirely if there’s an appraisal or funding contingency in your purchase agreement.
Disputing the Appraisal Results
If you disagree with the results of a home appraisal, you can request that your lender review the report. This is especially important if you know of recent comps that were excluded in the valuation or information that was unavailable to the appraiser at the time.
Lenders typically offer an appeals process, also referred to as reconsiderations of value. Ask your lender how you can appeal an appraisal that you find unsatisfactory.
Home Appraisal FAQ
Here are answers to some frequently asked questions about home appraisals.
Most lenders allow buyers to be present for the appraiser’s inspection of the property they’re purchasing. Check with your lender early on to ensure that you can attend.
Your purchase agreement could come with certain contingencies, which are conditions that must be met for the sale to go through. An appraisal contingency means that if the result of the appraisal is lower than your offer price, then you can walk away from the deal and keep your earnest money. This also gives you more leverage to negotiate with the seller.
Without an appraisal contingency, you’d have to forfeit your deposit if you cancel the deal.
The Bottom Line on Home Appraisals
Whether you’re buying, selling, or looking to refinance your mortgage, a home appraisal is an integral part of that process. Knowing what to expect from an appraisal could help you make the most of the results and reach the right decision for your finances.
Rory Arnold contributed to the reporting of this article.