Home Appraisal: What It Is And Why It Matters

A long-held adage of market economics is that a thing “is worth what someone is willing to pay for it.” In a real estate sale, this is not always the case. A home appraisal is the more accurate assessment of the value of a house than the mutually agreed upon price arrived at by the buyer and seller, at least in the eyes of a mortgage lender.

What Is A Home Appraisal?

A home appraisal is conducted by a neutral, licensed appraisal contractor to determine the fair market value of a home. After a buyer and seller agree to a price on a home, the appraiser is hired by the prospective lender to determine the home’s value based on recent sales of comparable homes in the area, as well as the appraiser’s judgement after an analysis of the property.

It's important to consider the difference between the appraised value and the market value of a property. While the appraised value can be seen as what a home is actually worth, the market value can be seen as the price that the property ultimately sells for, on the open market, based on supply and demand.

Imagine a house with lots of expensive updates and excellent curb appeal goes up for sale in a very desirable neighborhood and a seller’s market. After just two days on the market the seller receives multiple offers well above the asking price and eventually accepts the highest bid. This is the market value of the house.

When the appraiser looks at the house, the value in his or her eyes may be considerably less. What’s happened is that a demand bubble has driven the price artificially high. The appraisal puts a check on the market value, a warning to the lender to be wary of lending too much for the property. Ultimately, the appraised value is more important in whether the lender will agree to the loan and the deal can go forward.

Appraisal Vs. Inspection

It can be easy to conflate home appraisals and home inspections – after all, they both involve a third party coming to visually assess a house. But a home appraisal differs from a home inspection in that it is less thorough when it comes to a specific assessment of the home’s physical structure. Rather, the appraiser looks at the home’s value in the broader context of the current time in the marketplace.

A home inspector is there with the intention of identifying weak points or problem areas in a home, which can give the home buyer a better idea of how much it will cost to maintain or repair any issues. Home inspection reports are extremely detailed, with evaluations on interior structures, utilities and everything else which makes up the property.

Home appraisals, on the other hand, are less detail-oriented and will typically focus on identifying glaring visual defects, like foundational issues, water damage or a caving roof. Appraisers are not there to look in-depth for every red flag – their main purpose is to assign a value to the property, which is why they will also consider things like location, sale prices on comparable homes in the immediate area (sometimes known as “comps”), crime rates and school zones.

Here are a few other ways that home appraisals may differ from home inspections: 

• Lenders require home appraisals, not home inspections
• Home appraisals will be ordered for you by your lender, while you must set up a home inspection independently 
• Home appraisals have the potential to affect your loan
• Accompanying a home inspector during their inspection is encouraged; you should not tag along during a home appraisal
• Home appraisers and home inspectors have different skill sets and respective trainings and certifications to get their jobs done 

How The Home Appraisal Process Works

As you might expect, how long the in-person visit of a home appraisal takes depends largely on the size of the home. For a modestly sized property, a full appraisal may take no longer than a half-hour, while large homes could take several hours.

Other factors which can affect how long it takes to have a home appraised include timing, location and the availability and workload of appraisers in the area. In a busy market, it’s probable that the appraisal company is backed up.

Once a home is physically assessed, the appraiser will gather data on comparables – or recently sold homes in the area that are similar to the property under appraisal. Based on the information they’ve gathered, the appraiser will create a report detailing the home with an estimated market value. Start to finish, this process may take a few days or even weeks, depending on how backlogged the appraisal firm is at the time.

Steps Of The Appraisal Process

1.    The Appraiser Visits The Property

A home appraiser examines every part of the house, inside and out, thoroughly. They will make notes and take photos as they go. They will verify square footage, note any additions, address mechanicals and structural integrity, and estimate the age of things that may need replacing, such as the roof or an air conditioning unit. The appraiser will also assess how the house presents cosmetically, like landscape and curb appeal, paint, flooring, windows, even cleanliness. Yes, cleanliness is considered because cleanliness projects care, while a dirty house can suggest a lack of attention to detail and perhaps even rodents, insects or other pests.

2.    The Appraiser Researches Comps

After a hard look at a property, the appraiser’s next task is done on computer, researching the sale prices of comparable homes in the same area in the last 6 months at least. The reason for this is that “comps” will have similar buyers to those most likely to buy the house in question. They like the same neighborhood and the school district, for example. And they have a similar budget.

3.    The Appraiser Writes An Appraisal Report

After a thorough examination of the physical house and an assessment of the current market, the appraiser draws on their experience to offer an opinion on how much the house is worth. Again, this is not necessarily what it will sell for. As a client of the lender, the appraiser’s job is to advise on how much they should loan.

Types Of Home Appraisals

• Drive-by appraisal: For a normal home sale that requires a mortgage, a drive-by appraisal is rare. A lender requires a full assessment of a house, inside and out. A drive-by is just that, an exterior assessment only. It became more common as a safety precaution during the COVID pandemic. But for lesser transactions, such as a home equity loan, a line of credit or some refinances, the lender may still conduct a drive-by appraisal to move the process along.
• Hybrid appraisal: In a hybrid appraisal, the internal and external assessment of the property and comparable research are done by two different professionals. Typically, the lender will order an appraisal from the Appraisal Management Company (AMC). An appraiser and data collector are assigned to the property by the AMC. Data collection is completed first and the information provided to the appraiser. The appraiser then uses the information from the data collector and their own research to complete a final appraisal.
• Desktop appraisal: Just what it sounds like, a desktop appraisal is done entirely through online research of the neighborhood and local real estate comps to arrive at the appraised value of a home. No in-person property inspection is conducted. Many lenders will not accept a desktop appraisal as credible.

What Do Appraisers Look For In A Home Appraisal?

Each appraiser may have their own way of completing the home appraisal process, but many will look at the following characteristics:

• The lot and size of the home – this means square footage and the number of proper bedrooms and bathrooms
• The age, design and floor plan of the home
• Age and condition of the mechanicals, such as plumbing, electrical service, furnace and AC units
• Age and quality of any renovations
• Health and safety considerations 
• Curb appeal and exterior appearance
• Age and quality of the appliances
• Condition and insulation value of the windows
• Permanent upgrades to the property including basements, pools, decks and garages
• The overall quality and condition of the home
• Age and condition of the roof
• If the property conforms to the neighborhood – for resale purposes
• Comparable homes in the area and what they have sold for 
• Quality of life in the community, like schools, crime rate, peace and quiet, available shopping and restaurants, etc.

What Hurts A Home Appraisal?

Here are some of the common flaws in a house that will cause an appraiser to mark it down in value:

• The community has declining property values due to poor schools, rising crime or general decline in quality
• Poor curb appeal, including the exterior presentation of the house and/or uninspired or tired landscaping
• Outdated mechanicals like electrical service, plumbing or major appliances
• Outdoor living space, such as a wood deck or brick patio, that is in poor condition
• No outdoor living space
• Bathrooms or kitchen need renovation
• Wood floors need refinishing or carpet needs to be replaced
• Windows need to be replaced
• Aging roof

How Much Does A Home Appraisal Cost?

Because it is a service provided by a licensed professional, the appraisal must be paid for by the prospective buyer, even if the loan is from the Veterans Administration (VA) or the Federal Housing Administration (FHA). The cost can vary but a typical traditional appraisal costs between $600 – $2,000.

Who Pays For A Home Appraisal?

As discussed, with a traditional loan the appraiser is hired and paid for by the lending institution. This fee is then folded into the costs the buyer pays to the lender at closing, so ultimately the buyer is paying for the service. The only difference with VA and FHA appraisals is the lender works with an appraisal management company who sends a VA certified or FHA certified appraiser.

Why Are Home Appraisals Important?

A home appraisal is chiefly thought of as an important step in the process of a home sale. That is true, but appraisals have other uses as well. Here are several of the most common uses for a home appraisal:

Appraisals For Home Buyers

For someone who is buying a home, an appraisal is a third-party assessment of the true value of the home. The buyer hopes that the appraiser confirms that the value is the same or less than what the buyer has offered, so that the loan can proceed. If the appraisal is higher than the price paid, the buyer will have to either back out of the deal or pay the lender cash for the difference at closing.

Appraisals For Home Sellers

When you’re selling a house, a low appraisal can mean you’ll have to accept less for your home than you may have anticipated. In other words, you’ve lost money by accepting an that is too low. To avoid this, work with your agent and put together relevant documentation for the appraiser that could get you a more accurate valuation. For example, don’t expect the appraiser to automatically know you’ve just installed a brand new, top-of-the-line furnace.

Appraisals For A Refinance

Just as when you first purchased your home, your lender will want to know what your property is valued at during the process of a home refinance. Lenders want to ensure you have sufficient equity in your home and that you don’t owe more on the property than it’s worth. Refinancers should follow the same advice given to sellers: Put your home’s best foot forward for the appraiser by tidying up and preparing documentation of any upgrades that could boost its value.

Appraisals For A Home Equity Loan

Rather than do a cash-out refinance, some borrowers prefer to borrow against the equity they have in their home. With a home equity loan, your home serves as collateral for the loan and as such your lender will require that home undergoes a full appraisal.

Appraisals For A Bankruptcy Filing

The legal standard for home valuation in bankruptcy is fair market value (the price your home would be sold for) on the date the bankruptcy is filed. It is important to have a recent valuation not more than a few months old. A full appraisal is the best and most respected valuation in the bankruptcy process, while a comparative market analysis (CMA) appraisal, which does not include an on-site inspection, is less expensive but not as respected.

How To Prepare For A Home Appraisal

While an ethical appraiser is supposed to maintain neutrality, favoring neither the buyer nor the seller, there are things that each party can do to ensure the best appraisal outcome for their interests.

Appraisal Tips For Home Buyers

Some of the worst news a home buyer can hear after having their offer accepted is that the house “didn’t appraise.” This means that the appraised price came in lower than the buyer’s offer, and they will have to try to renegotiate the sale price down or increase their down payment to satisfy the lender.

Sometimes in a seller’s market or during a bidding war on a particular house, the buyer offers much more than comparable houses in the area recently sold for. The best way to avoid this is with thorough research of comps similar to what the appraiser will do. The buyer’s REALTOR® should be able to do this very easily.

Appraisal Tips For Home Sellers

Much of what a seller can do to ensure a high appraisal are the same things they should do before even putting the house up for sale. In conjunction with their REALTOR®, a seller should make a thorough and honest assessment of the house, noting potential issues that might reduce the home’s value or alarm the appraiser. A REALTOR® should also have assessed sale prices of comparable homes in the neighborhood. If there were multiple offers on the home, the seller can provide a list of these to the appraiser to further justify the sale price.

Next, the seller should make any small repairs on things that might attract the appraiser’s attention. Further, it’s good to clean and declutter the house to have it looking its best. Curb appeal helps. A house with a freshly mowed lawn and trimmed bushes looks better and even smells nicer.

Appraisal Tips For Refinancing

Even though you’re not selling your home, it doesn’t mean you should skip preparing for the appraiser’s visit. The higher the fair market value of your home, the more equity you can use for your refinance. Aside from staging your house, inside and out, exactly as if you were selling it, one document you can present to the appraiser is a detailed list of major mechanical upgrades, renovations and additions made under your ownership. This should include the dates, costs and permit numbers if applicable. Try to be present for questions, but not invasive of the appraiser’s space as they go about the assessment.

What Happens After An Appraisal?

As long as the appraisal comes in as equal to or above the buyer’s offer, the loan process moves into the underwriting phase, in which the details are assed for risk and ultimately approved, turned down or sent back for changes. If the home appraises for less than the sale price, however, the lender will not proceed unless the buyer is able to come up with cash to cover the difference between the sale price and the appraised value. At this point the buyer may be able to convince the seller to lower the price of the property so that the deal can go forward.

How To Find A Home Appraiser

Since the mortgage lender is assuming the risk loaning you money to buy a house, they will often have a pool of appraisal companies and individuals they trust to be professional and objective. They will hire and pay the appraiser and then pass the costs along to the buyer at closing.

Individual homeowners who are contemplating putting their house up for sale or refinancing will often hire an appraiser themselves. There are lots of appraisers to be found online, but it can help to contact a couple of local REALTORS® and ask for suggestions. These agents work with appraisers every day. They are motivated to help you because they hope to get your listing if you decide to put your house on the market.

The Bottom Line

Almost all homes that are purchased with mortgage financing must be appraised before the loan can proceed. The lender wants to be sure that the property is not worth less than the amount they are financing, and they rely on the assessment of a home’s value made by a professional appraiser. In a way, the appraisal is an extra layer of protection for the buyer, as well – by preventing them from paying too much for a home.

Homeowners looking to refinance or prospective home buyers who are ready to apply for a mortgage can both get started online with Rocket Mortgage^® today.