What’s an Appraisal and Why Does It Matter?

Love Selling Your Home – Week 8

This is the eighth article in the series called, Love Selling Your Home: Minimize Your Stress, Maximize Your Profit, a step-by-step guide to selling your home. This series takes you through the entire home-selling process — from finding a real estate agent to closing day.

Just because your home is under contract doesn’t mean it’s time to celebrate just yet. It’s time for your home to be appraised, and the results could sidetrack the entire transaction.

This is an important step in the closing process. The sale of your home can’t move forward until the appraisal is done and the lender has given its stamp of approval.

You don’t want the appraised value to come in lower than the contract price.  If so, the lender won’t approve a loan for more than what the home is worth. That means that the price you’ve set for your home is not going to happen!

Now is a good time to understand this process.

Here are the ABC’s of an appraisal and what you can do to protect yourself as a seller: 

Home Appraisal 101

What is an appraisal?

• An appraisal is an unbiased professional opinion of a home’s value that the lender will use to determine if they will lend money to the buyer.  Usually, the lender will order the appraisal, but the borrower will pay for the report.
• Don’t confuse an appraisal with a home inspection, which is entirely different. Appraisers are not home inspectors looking for leaky roofs, testing appliances, etc.  Your buyer will get a home inspection sometime after the contract is signed.  The appraisal is typically done well after that. 

Why does it matter?

• The lender wants to make sure the buyer is not overborrowing and that this is a sound investment.  The lender wants to protect itself in case the buyer defaults on the loan. The lender also wants to ensure that this home exists and is habitable.
• No appraisal is needed for all cash buyers.  Since the buyer doesn’t need a loan, you won’t have to deal with a bank or appraisals at all. That’s a big plus as a seller.

What does it entail?

• An appraiser will tour the home and make notes about how it compares to other homes that have sold recently nearby. A licensed appraiser’s report is much more detailed than a comparative market analysis (CMA’s – what real estate agents prepare) and is the only valuation report a lender will use.
• The valuation is based on market trends, supply and demand, and duration on the market. It also considers any extenuating factors such as upgrades or something like having a garage or an extra room.  It also will take into consideration the home’s condition, location, and features.
• The report will also include statements on any issues that may hurt or help the property’s value. Since it’s never an “apple-to-apple” comparison, the appraiser will make adjustments to the appraisal for some features of a home — a finished basement, a coveted view, updated appliances, or HVAC (heating, ventilating, and air conditioning) systems.  Remember, some improvements don’t add as much value as you would like … such as a new half bath, landscaping, etc.
• For a condo unit, an appraiser will consider the number of units in the condominium community, how many are on the market and how many were sold.  The most weight is given to units that have sold in the same building since buildings are so different, even in the same neighborhood.

Be Aware of Appraisal Law

The appraisal process went through a change when the Home Valuation Code of Conduct was passed. This law was meant to make appraisers more independent and not “hired” by the real estate agents, the buyer, the seller, or bank handling the transaction.

But in some cases, appraisers may not be local to the area where they were appraising homes, especially when appraisal management companies are involved.

There’s been some questioning of how well these appraisers know the neighborhoods and the “true” value of a home when an appraisal comes in too low.

What Can You Do to Protect Yourself?

• You want to have an appraiser who knows the local area and has worked in your neighborhood beforehand. This is someone who could recognize any skewed comps if that’s ever the case.  If there is a lower appraisal from one of these appraisers, we can make a “case” for another appraisal.  If you are buying a new home when you sell, it’s important to use a local lender who will hire a smaller list of seasoned appraisals.
• As a seller, you could get an appraisal yourself before you even list your home to help you determine the asking price.  You could give this prelisting appraisal to the buyer’s appraiser to add to the data and perspective of the final report.
• You should question a low appraisal. Do this to make sure nothing was overlooked or inaccurate in the report (see more details below). 

What If You Get a Low Appraisal?

If an appraisal comes in lower than the contract price, it may mean the end of the sale with this particular buyer.  However, there are steps you can take to help avoid this and to also move the sale along.

It might be worth the time to work with this buyer rather than start all over again, but you might just have to do that if many of these actions below don’t work.

Provide details on any home improvements to the appraiser so nothing is missed. Your agent can contact the lender so they can connect with the appraiser who is hired to evaluate your home.

Ask to review the appraisal to see if any adjustments were made, especially if you submitted information to the appraiser. A lender has to comply with the request within 30 days.

Appeal the appraisal for a reconsideration of the value of the home.  Provide the comparables you and your agent think represent the home’s value better and why. You will need to show any discrepancies between the appraisal and any improvements or unique features of the home.

Ask for another appraisal, but you would have to pay for it. However, if it’s an FHA loan (An FHA mortgage is a type of mortgage that is insured by the Federal Housing Administration), an appraisal stays with that home for 6 months so you can’t ask to switch lenders or get a new appraisal.  Buyers, on the other hand, could switch lenders and start over with a new appraiser.

Ask the buyers if they are willing or able to pay for the higher contract price and make up the difference themselves. Some buyers may be willing or able to make a larger down payment. If it’s a tight market, the buyers may feel the pressure to pay since there could be another buyer in line who is able and willing.

Renegotiate with the buyer and offer a lower price or pay for closings costs. If you don’t have any other potential buyers, you may need to make such accommodations so that the sale does go through.

If any of this feels overwhelming, don’t worry, these are the types of things I “worry” about in the background, so everything goes smoothly on your end. 😉