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An appraisal can make or break a transaction for a buyer or seller, so it’s in your best interest to understand how appraisals work.
- Knowing how appraisals work can help buyers and sellers make more informed decisions.
- A sale can fall through if an appraisal comes in too low.
- If an appraisal comes in low, appraisal contingencies and appraisal gap coverage can help buyers protect their interests.
- When an appraisal comes in at or higher than the sale price the transaction usually goes through.
- Good appraisal preparation can help you sell our home for more money.
Not sure what an appraisal is? Start here with the basics about what appraisals are and when they’re necessary. Or skip down for more about how the appraisal process works.
Looking to get a quick home value estimate instead? Get a free, instant home valuation.
Understanding how the appraisal process works
A state-licensed appraiser selected by the lender carries out the appraisal. Appraisers must be neutral to the outcome of the sale to provide the most objective and accurate report possible. Neither the seller or the buyer has a say in choosing the appraiser.
What does an appraiser do?
Before the appraiser enters the house
Appraisers look at recent sales (homes sold within the past six months) of similar properties in the neighborhood. Comparing these houses’ features, locations, and curb appeal will help the appraiser better estimate the home’s value.
When the appraiser enters the house
The appraiser takes photos of the interior and exterior of the home, noting features or upgrades that add value to the house, such as updated kitchen appliances or a new deck. They also document areas that need to be repaired or replaced.
What does the appraiser do with the information they gather?
After the appraiser finishes visiting the property, they’ll compare the home to properties that share common features and characteristics. For instance, the appraiser will compare a three-bedroom, two-bath house with another that has a similar amount of bedrooms and rooms.
The appraiser uses all the information from their research to generate a report that provides their best professional analysis about the property’s value.
An appraisal report takes a few days to two weeks to complete. A finished report will include:
- A street map showing the appraised property and comparable sales
- An explanation of how the square footage was calculated
- Photos of the home’s front, back, and street view
- Front exterior photos of each comparable property
- Other relevant info, such as market sales data, public land records, and public tax records
Who gets the appraisal report?
Both the lender and the buyer receive a copy of the appraisal report. The lender evaluates the quality of the appraisal and chooses whether to move to the next stage of the transaction or conduct a review of the appraisal.
Appraisal vs. home inspection
An appraisal determines the value of the home, whereas an inspection determines the condition of the home.
Both appraisers and home inspectors will do a walk-through of the property to look for any obvious issues or problems. However, their exact purposes for conducting the walk-through differ, and they look for slightly different things.
|What it is:||An analysis of a home's value||An evaluation of specific features of the home|
|Who does it:||A licensed appraiser||A licensed home inspector|
|Who pays:||The home buyer||Usually the home buyer, though this can be negotiated|
|What it involves:||Market analysis, and often a brief walk-through to assess the general condition and features of the home||An in-depth walk-through of the home by a licensed home inspector (2-4 hours), followed by a detailed home inspection report|
How to prepare for an appraisal
Appraisal prep for buyers
To prepare for a potential low appraisal, a buyer may want to include an appraisal contingency or appraisal gap coverage in their contracts.
The problem with low appraisals
Buyers and sellers worry about a low appraisal because it can inhibit the buyer from getting a large enough loan to buy the house.
» Read more: If the appraisal is too low.
An appraisal contingency allows a buyer to back out of the sale or renegotiate if the appraisal comes back too low. This ensures you won’t have to pay more out of your own pocket if the appraisal is lower than expected.
Without an appraisal contingency, a buyer risks losing their earnest money if a low appraisal prevents them from buying the property.
Appraisal contingencies are included in approximately 46% of home-purchase contracts, but buyers might choose to waive this contingency to potentially help their offer get accepted in a competitive market.
A seller may prefer an offer without an appraisal contingency over one with an appraisal contingency since it reduces the chances of the deal falling through.
Appraisal gap coverage
Appraisal gap coverage states that, as a buyer, you’re willing to pay out of pocket any amount of money between the sales price and the appraised value, up to a specified amount.
Appraisal gap coverage makes a buyer’s offer more appealing to a seller, while also protecting a buyer from having to pay too much out of pocket if the appraisal comes in much lower than expected.
For example, let’s say a buyer’s appraisal gap coverage states they’ll pay up to $10,000 over the appraised value. Here’s what happens in the three possible scenarios:
- If the appraisal comes in at the same amount as the buyer’s offer, the appraisal gap coverage doesn’t come into play; the buyer doesn’t need to pay the $10,000.
- If the appraisal comes in $10,000 or less than the offer price, the buyer covers that gap up to $10,000.
- If the appraisal comes in more than $10,000 less than the offer price of the house, the buyer agrees to pay $10,000 of the gap.
Having appraisal gap coverage in a contract is a good middle ground when it comes to protection for the buyer. It’s not as comprehensive as an appraisal contingency, as you’ll only be able to bail out of the deal if the appraisal comes in lower than the amount you specify, but it shows the seller that you’re more serious about your offer.
Appraisal prep for sellers
Sellers can prepare for a better appraisal by researching similar homes that sold within the last six months and taking steps to improve the aesthetic appeal of their house.
First, sellers should research nearby homes that have similar layouts, square footage, features, and amenities to their own property. By reviewing this information, sellers get a good baseline idea of what their own house will appraise for and what might be the most accurate listing price.
Secondly, if the buyer has an appraisal contingency, it’s important that the house appraises at a value equal to or above the purchase price. If the appraisal comes back too low, the buyer can ask to renegotiate or back out of the deal.
Making sure your sale price is accurate ahead of time can prevent you from having to lower the price later or having to find another buyer.
You can also make minor fixes to your home to refresh its appearance and increase its potential value in the eyes of the appraiser. Here are some ideas to consider:
- Make simple cosmetic upgrades, such as upgrading outdated features in your bathroom or kitchen, switching to newer fixtures, and adding fresh paint.
- Boost curb appeal by maintaining your lawn, repainting the front of your house, or adding welcoming decorations or furniture to your porch.
- Clean your home thoroughly.
- Minimize clutter.
Need some help getting your home prepped for a high appraisal? HomeAdvisor can connect you with top local professionals free of charge for all your home repair projects.
What to do when an appraisal comes in
An appraisal determines if the sale price is on target, too high, or too low.
If the appraiser determines the value of the home is the same as its sale price, the transaction can go through. The buyer should be able to secure the money necessary to finance the house, and the seller will earn the amount they expected to make from the sale.
When an appraisal comes back higher than expected, it’s great news for buyers. It means they’re getting a good deal by paying less than the home’s appraised value.
On the other hand, the deal can fall through if an appraisal is too low.
If the appraisal is too low
A low appraisal will likely decrease the amount a lender will loan to the buyer, which can put the entire deal in jeopardy. This is because the lender’s loan-to-value (LTV) ratio, which determines what percentage of the total cost the loan will cover, needs to remain consistent to help the lender protect their interests while minimizing the risk of borrowers defaulting on their loan.
If you have an LTV ratio of 90%, for example, you can get a loan of $180,000 for a house appraised at $200,000. However, if this same property only appraised for $170,000 and you agreed to pay $200,000 for it, your loan would still only cover 90% of the appraised price, or $153,000. You’d be responsible for footing the rest of the bill yourself if you still want to purchase the home.
Since an appraisal can impact the buyer’s mortgage and how much they’ll have to pay for the down payment out of their own pocket, a low appraisal can make a buyer unable to afford the property. They may have to back out of the deal.
Buyers and sellers can also choose to mutually negotiate after an appraisal to reach an agreement.
If the appraisal is high
The buyer benefits if an appraisal is higher than what the buyer agreed to pay for the property.
It means they’re getting a good deal on the home and paying less than the home’s estimated market value.
A seller may try to negotiate with the buyer to pay more, but they can’t back out of the agreement unless they have a specific clause in their contract.
An appraisal shouldn’t be too much more than what a seller was expecting in the first place. Most listing agents conduct a comparative market analysis (CMA) to give sellers a good idea of what they can expect to receive for their homes.
Appealing an appraisal
If you believe the appraisal report is inaccurate you can request a second opinion, but it will ultimately be the lender’s call.
To successfully challenge an appraisal, thoroughly check the report to see if the appraiser made a mistake, such as:
- Miscalculating the square footage
- Overlooking valuable additions, such as a pool or a new deck
- Reporting the incorrect number of rooms
In some cases, illegal discrimination can affect the outcome of an appraisal. A nationwide study by Freddie Mac that analyzed over 12 million home purchase appraisals uncovered troubling statistics.
In predominantly white census tracts, only 7.4% of homes received low appraisals. However, 15.4% of homes in predominantly Latino census tracts and 12.5% of homes in predominantly Black census tracts were appraised at less than the contract price.
If you think an appraisal came back low due to discrimination based on your age, race, religion, sex, marital status, use of public assistance, or disability, you can file a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development
What do home appraisers look for?
Appraisers examine the inside and outside of the home for new upgrades or features. They also document the square footage of the property, and compare the house to similar properties in the neighborhood. You can try to improve the appraiser’s impression of your home by fixing cosmetic issues, adding new fixtures or hardware, and decluttering the space.
When do I need an appraisal?
You'll need an appraisal in most home buying or refinancing situations. Your lender will find and select an appraiser for you to make sure they have no interest in the outcome of the appraisal.
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