Feb 24, 2022

How does a home appraisal work?

Manny Cominsky

A home appraisal is a fundamental part of any house sale, and involves a state-licensed individual (the appraiser) calculating a fair market value for the home to ensure that all involved parties (generally the buyer, the seller, and the bank) get a fair deal. The two most common times to get an appraisal done are during a home-sale transaction or during a financing or refinancing. Appraisals are important as knowing the fair market value of your home is also key to having a successful sales process - pricing the home too high risks scaring away buyers, while pricing the house too low leaves money on the table. Understanding exactly how an appraiser calculates the value of your home will enable you to maximize its appraised value and make the most of any real estate sale.

Comparable Market Analysis

The core of any appraisal is what is known as a comparable market analysis, which compares your home to similar properties in the area. Similarity is determined by looking at major home features, generally including things like: square footage, home age, number of bedrooms and bathrooms, architectural style and key features (like a pool), and the size of the lot. While these main factors will largely drive your home valuation, your home’s value can be affected by any prominent feature. For instance, a particularly private home - due to features like trees or other homes - may snag a higher price than a similar home that is exposed to the entire neighborhood. Similarly, a stunning view may greatly increase the price of a home that would otherwise sell for far less. If you’re doing an informal appraisal yourself to see what your home might sell for, or having it done professionally, finding as many homes with as many similarities to yours will be central to the analysis.

Sometimes the most valuable part of the house isn't part of the house at all, it's the great view!

More specifically, an appraiser will often use the Uniform Residential Appraisal Report when conducting an appraisal. This report asks the appraiser to consider the exterior and interior of the home, the neighborhood the house is located in, and comparable recent home sales. In addition, the appraisal report will include several additional elements including a street map showing the property and all nearby properties used as comparators, photos of the home, and a sketch of the building. The appraiser must also include their calculations describing how he or she arrived at their estimates. Generally speaking, an appraisal will take one to two weeks to be completed and cost roughly 300-400 dollars for the buyer.  

Why Appraisals Are Important

Appraisals are so important because they are one of the first steps in the closing process. The actual act of buying a home generally takes place over two steps - the offer and the close. Once a home is under contract, the buyer will arrange for an appraiser (usually chosen by their home mortgage lender). If the appraisal for the home is at or above the value of the home as indicated by the purchase price, then there is generally no problem and the sale will proceed to the second step of closing.  In some cases, if the house is appraised for a significantly higher price, the buyer may need to provide additional funds at the closing.

However, a buyer may be unable to get financing for the purchase if the appraisal comes in below the price of the house under contract as many lenders will not lend a buyer more than the appraised value of the home. In many cases where there is a low appraisal, the seller will be forced to lower their sale price. Thankfully, many lenders will give the option to appeal a bad appraisal, usually making the person appealing submit evidence showing why the original appraisal was wrong.

Preparing For Your Appraisal

Unfortunately, the appraised value of your home will be largely out of your control as it is so heavily based on things you cannot change, namely the location and the value of surrounding properties. Although while you can’t change the your home’s location, you can still help make the appraiser see it in the best light possible by letting them know about any recent upgrades to the neighborhood such as highly rated schools or new transportation or shopping options.  While an appraiser will probably know the highlights, it never hurts to let them know about the area, particularly where the addition in question is new.

Make sure to prepare your home so your appraiser gets the best impression possible.

There are a couple other easy things that you can do to get your house in the best condition possible and reduce the chance of a low value appraisal. First, make sure you have all the relevant documents relating to the property and the value of the home. This could include documents like land surveys of the property or receipts showing the work that went into various upgrades around the home (for example, a very expensive new fridge). Next, make sure to tidy up both the interior and the exterior of the home. This includes not only making sure the house is clean and put together, but also doing any necessary yard work to ensure that the property is seen in its best light. Finally, make sure you do any necessary minor repairs around the home. A leaky faucet or broken gutter can leave a bad impression on an appraiser.

Once the appraisal is completed, the closing moves on to the mortgage underwriting process, where the lender determines whether, based on the value of the home and other submitted documents, whether the loan is too risky and therefore whether the lender will or will not grant the loan. So while you may think that an appraisal is just a routine part of selling a home, it actually is a very important piece of the puzzle. Make sure to plan and prepare for your appraisal to make sure that you have the smoothest and most profitable real estate transaction possible.

If you want to learn more about the home buying and selling process, particularly if you are looking to relocate as part of your retirement, please reach out to us at info@sunboundhomes.com or visit our services page to find out all the ways in which Sunbound can help you tackle your real estate challenges.

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