Updated: Feb 7, 2020
Regardless of buying or selling a home, the appraisal plays a key role in whether or not the transaction comes to fruition. The buyer needs the home to appraise for the sales price or above, in order to secure financing to purchase the home. The seller needs a good home appraisal is important to secure the best offer for their home.
What is an appraisal and why is it needed?
An appraisal is a home valuation report conducted by a licensed appraiser that gives you a professional opinion of value for a specific property. Lenders require an appraisal to be conducted before loaning funds to purchase a property to protect their investment. The bank wants to ensure the value of the home, in the event they need to sell the property because mortgagee/borrower defaulted on their loan.
Who orders the appraisal?
The prospective borrower pays for the appraisal and orders it through a 3rd party service provided by the lender. Using a 3rd party service ensures the lender gains an unbiased picture of the home they're lending money on. The appraiser schedules their evaluation with the listing agent, or homeowner who owns the property, conducts their analysis of the property and submits a report of value to the lender.
An appraisal will cost you between $450 and $750, depending on the type and location of the property, as well as the appraiser hired. The entire process of the appraisal takes about 10 business days from ordering the appraisal, day 1 being the day after being ordered.
What should you do as a buyer?
You wait! It is important to not interfere with this process and let the appraiser do what they do best. Follow up with your lender about any additional documentation you might need to submit to satisfy your loan- and follow up with your lender a few days after the appraisal has been conducted to review the appraisal report.
What should you do as a seller?
Contrary to popular belief, you do not need to leave your home during the appraisal. In fact, we've found it most helpful for the homeowner to be there to answer questions about the home- have a conversation with your agent so you're prepared on what to communicate to the appraiser. Most real estate listing agents addend the appraisal as a courtesy to the seller, for this reason; we want to make sure the appraiser has as much information about your home as possible, to ensure a proper value assessment. (Webb Realty Pros always attends the appraisal as the listing agent.
If you can't be home to attend the appraisal, make sure that all access to the attic, basement, crawl space, garage, barns, sheds, etc are accessible to the appraiser. If something is locked or bolted shut, unbolt it for the appraiser; they are not allowed to access any areas of the home that are locked or closed off. Make sure they can get a ladder and any other necessary equipment to these areas, as well.
If an appraiser needs to come back to the home to re-inspect a deficient or inaccessible feature of the home, there are re-inspection fees. Oftentimes the buyer passes that charge on to the seller claiming negligence in preparing for the appraisal.
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How do they evaluate the value?
The appraiser analyzes the neighborhood, and details and condition of the home. The appraiser then compares the subject property to other properties that are a close comparison to the subject home. They are required to provide 3-12 homes, depending on type of mortgage and style of home, within a specific range of criteria that most compares to the subject property, to help build the property valuation report.
These properties are typically found within the same neighborhood or within 1 mile of the subject property. And they've sold in the last 90-120 days. The properties are within 25% of the size of the subject property in square footage and property size. And similar in appearance, condition and amenities.
Your realtor should have a good grasp on this process and give you a solid idea of what the market value of the property is at the time of offering. Unfortunately, an appraisal is an opinion of value, so if the valuation comes in low, trust that the appraiser has found something that the agent may not have found at the time of creating a market analysis.
What happens if the value comes in low?
If the value comes in low, it could delay or cancel the transaction; lenders don't want to loan over value, buyers don't want to over pay for a property and seller's don't want to drastically reduce the price of their home to sell.
That being said, there are a few options to help the transaction stay on track.
1. The purchaser and seller can re-negotiate the offer price for the home
2. The seller can reduce the sales price to reflect the low appraisal amount
3. Depending on the way the appraisal contingency is written, the buyer can walk away
4. The buyer can bring additional funds to close to cover the deficiency in value
5. The buyer can dispute the appraisal findings, offering additional comparable properties that fit the subject property to help increase the value
While disputing the appraisal is possible, and sometimes fruitful, most of the time it doesn't change the deficiency enough to satisfy all parties and some negotiations have to occur.
What happens if the value comes in high?
In the rare chance the home appraises for higher than the sales price, stop holding your breath and take a big sigh of relief! You are buying below market value and have instant equity in your home. What you don't have is an opportunity to borrow more money or use the excess to buy down mortgage points.
What happens after the appraisal report?
Typically, once the appraisal is submitted, and the value is agreed upon, the property stays along the path of the existing transaction and you should be about 2-3 weeks away from closing on the property. During this time, you'll button up the final documents needed for your lender, you'll conduct the property walk through and most of all, you'll be packing!