What is an appraisal?

A man and a woman are standing in an empty house, looking over the specs of the home...Image: A man and a woman are standing in an empty house, looking over the specs of the home...

In a Nutshell

An appraisal is an estimate of a home’s current market value, calculated by comparing the property to other homes that recently sold in the area. Mortgage lenders often require an appraisal to ensure they don’t give a borrower a bigger loan than the property is worth.
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When you buy a home or refinance a mortgage, an appraisal is usually an important step in the process.

Before your lender finances the home purchase, it’ll require an appraisal. An appraisal helps the lender gauge the condition of the home and establishes its fair market value.

What is an appraisal?

An appraisal is an estimate of the value of the home. To calculate this value, an appraiser compares the property to other recently sold homes in the area. The appraiser may inspect the property to determine its condition and other features.

An appraisal gathers enough information about the property to develop an opinion on the home’s value. This protects the lender by ensuring that the lender doesn’t finance a mortgage that’s more than the property is worth. That way, if a borrower doesn’t repay the loan, the lender can recoup its losses by foreclosing on the property and selling it.

But while a home appraisal often includes a physical review of the property, it’s not the same as a home inspection.

A home inspection protects the homebuyer by looking more deeply into the home’s physical condition, systems and components to uncover defects that may not be obvious to prospective buyers.

What does an appraiser do?

Most appraisers must be state licensed or certified to offer home appraisals. Requirements vary by state.

Home appraisal procedures include comparing the property to recent sales of similar homes in the area. Homes with comparable age, quality and amenities help the appraiser figure out the home’s fair market value. This is referred to as the “sales comparison approach,” or comparable sales.

An appraiser may visit the property as part of the process, but sometimes they rely more on technology. Check with your lender to see what type of appraisal they’ll request. There are several ways to conduct an appraisal.

  1. Traditional on-site appraisal — Some lenders require appraisers to perform an interior inspection of the property. When an interior inspection is needed, the appraiser contacts the homeowner or sales agent to schedule an inspection of the interior and exterior of the property.
  2. Drive-by appraisal — If the lender doesn’t require an interior inspection, the appraiser may do an exterior-only appraisal, also known as a drive-by appraisal. During a drive-by appraisal, the appraiser examines the property from the outside — usually from a public roadway — to estimate the home’s value.
  3. Hybrid appraisal — A hybrid appraisal allows the appraiser to use information from a third-party source to complete the appraisal without ever physically visiting the property. For example, they might use photographs from the home inspection or view the interior and exterior of the home virtually.
  4. Desktop appraisal — In a desktop appraisal, the appraiser uses information available online to determine the property’s value. This information might include property records, floor plans and more.

What to expect from an appraisal

After the appraiser gathers the information necessary to complete their work — either virtually or in-person — they’ll put together an appraisal report that includes an opinion on the property’s value.

If the appraised value is equal to or greater than the home’s purchase price, you should be able to continue with the purchase or refinance process. But a home appraisal that comes in lower than you or the seller expected leaves you with the following options:

  1. Negotiate with the seller. You may be able to get the seller to lower their purchase price. This might not be an option in a hot housing market where buyers are getting into bidding wars over homes.
  2. Come up with extra cash. The most a mortgage company will usually lend is the home’s appraised value minus your down payment.
  3. Withdraw your offer. This means walking away from the deal and potentially losing any deposits.

Appraisers generally aren’t allowed to redo their appraisal just because one party to the transaction disagrees with the result. But it’s always a good idea to review the appraisal report carefully to ensure you agree with the appraiser’s findings. After all, appraisers are only human, and they can miss important information about the property.

How much does an appraisal generally cost?

While lenders are usually the ones that require the appraisal and choose the appraiser, homebuyers pay for them. The appraisal is an expense that’s not based on the outcome of the appraisal. You pay the appraiser for unbiased work and not to get a specific outcome.

According to HomeAdvisor, an appraisal on an average single-family home may cost around $300 to $400, though it may be slightly more depending on several factors, including …

  • Size of the home — Larger homes may take longer to review.
  • Condition — If the property is damaged, it will take more effort to appraise than a home in good condition.
  • Availability of comps — If there are no comparable homes nearby on which the appraiser can base an estimate, it’ll take more time for the appraiser to use an alternative approach and cost more.

What’s next?

If your home is appraised at or above the asking price, you probably won’t have as many questions as if the appraisal comes in with a lower value than the asking price.

Finding out the home you want to buy was appraised for less than the agreed-on purchase price is never ideal. That’s why it’s a good idea to include an appraisal contingency in your purchase offer. An appraisal contingency clause in a purchase contract allows the potential buyer to back out of the transaction (and have their good faith deposit returned) if the property appraisal doesn’t meet or exceed the purchase price.

Keep in mind that while an appraisal is designed to protect the lender, it can also protect you from spending more on a property than it’s worth. This can provide you with peace of mind as you make what may be the largest investment of your lifetime.

About the author: Janet Berry-Johnson is a freelance writer with a background in accounting and insurance. She has a bachelor’s degree in accounting from Morrison University. Her writing has appeared in Capitalist Review, Chase News &a… Read more.