Whether you’re buying, selling, or refinancing your home, a home appraisal is something you’ll want to understand – at least at a high level – to ensure your real estate transaction goes as smoothly as possible.
Here at the Joe Dickerson Group, we’ve helped our clients through hundreds of appraisals throughout the Bay Area. Sometimes the appraisals go as planned or even better than expected; other times, the appraisals come back low, and we have to regroup.
Wherever you are in the process, it’s important that you take time to learn about the home appraisal process so that you can get the most out of it and make sure you’re set up for success.
In this article, we’ll share with you a behind-the-scenes look at appraisals, how they work, why they’re such an important part of the process, what they mean for you, how to prepare for them, and what to do with the results.
What Are Home Appraisals?
A home appraisal is the estimated value of a home as determined by an inspection of the property by a third-party professional appraiser.
The appraiser uses the home’s condition, in conjunction with recent comparable home sales in the area, to estimate the home’s value. This helps the lender determine how much they can lend to the buyer purchasing the home.
The home appraisal can include…
- Recent sales data for similar properties in the area
- Current condition of the home
- Location of the home
- And more
It’s important to know that an appraiser is trained to determine the fair market value of a home objectively and without personal bias.
Home Inspections Vs. Home Appraisals
It’s easy to get a home inspection and appraisal mixed up. After all, they are both aimed at examining the condition of your home and producing a report. But that’s where the similarities end.
The purpose of a home inspection is to evaluate the home’s condition and provide you with a list of recommendations on home repairs and other things you should look out for regarding maintaining your home.
A home appraisal, on the other hand, provides an estimate of the home’s value based on its existing condition; the appraisal does not take into account or make recommendations for potential repairs or improvements.
A home appraisal is required by the lender, while a home inspection is recommended but not mandatory in most cases.
In many cases here in the Bay Area, sellers will order their own inspection and provide potential buyers with an inspection report. This ensures that there are no hidden surprises, which helps ensure as smooth a transaction as possible.
Do You Need A Home Appraisal?
If you’re in the process of buying a home and are looking to apply for a mortgage to buy the home, your lender will most likely require an appraisal, and your real estate agent will most likely suggest that you include an appraisal contingency in the sales contract.
The appraisal contingency lets you walk away from the home purchase if the home appraisal comes in too low to justify the agreed-upon purchase price.
In the competitive Oakland and East Bay real estate landscape, it might be tempting to bypass the appraisal contingency to make your offer more competitive.
If you’re buying your home with all cash, this could be just fine. However, if you need a mortgage to purchase the home and decide to bypass the appraisal contingency, you could be putting yourself at risk.
This is because, if the home appraisal comes in lower than the purchase price, you’ll be on the hook to pay the difference. You can always try negotiating with the seller to lower the price, but they may not budge given the competitive market.
Why Does The Lender Require A Home Appraisal?
When you apply for a mortgage to help you purchase a home, the lender is on the hook for the majority of the money needed to purchase the home.
If you’re putting in a down payment of 20%, that means that the lender will be putting in 80% of the money. The home appraisal is the lender’s way of ensuring that the amount they’re lending you is in line with the actual value of the home.
The appraisal protects the bank by ensuring that it doesn’t lend you more money than the property is worth. If the home later goes into foreclosure for any reason, the lender wants to be sure they can resell the property and get its money back.
Without a home appraisal, the lender is flying blind and could take on a lot of risk by potentially lending you more money than the property is worth.
How Does The Appraisal Value Impact How Much The Lender Will Lend You?
Once the lender receives the home appraisal report, they now have a more accurate understanding of the home’s value. With that in mind, they will loan you either the purchase price or the appraisal amount – whichever is lower.
In other words, if your purchase price is $500,000, and the appraisal comes in at $450,000, the lender will only lend you $450,000 (minus the down payment).
This could mean that you will be on the hook for the $50,000 difference between the loan amount and the purchase price, which is why the appraisal contingency is so important.
How Does A Home Appraisal Work?
Step 1 – Lender Orders The Appraisal
Typically, the lender orders the home appraisal, and the buyer pays for the appraisal, which typically costs between $300 to $600.
Step 2 – An Appraiser Visits The Property
During the home appraisal, the appraiser visits the home for anywhere from 30 minutes to a few hours.
During that time, the appraiser measures the dimensions of the home, examines amenities, evaluates the overall conditions, takes lots of photos of both the interior and exterior of the home, and more.
Here are some of the top things appraisers look for during the home appraisal process:
- Lot and home size
- Age and design of the home
- Exterior and interior condition of the home
- Structural integrity of the home
- Amenities, such as fireplaces, decks, porches, garages, etc.
- Local housing market trends
- Sale prices of comparable homes recently sold in the area
- Total room count, with value added to bedrooms and bathrooms
- Interior room design and layout
- Improvements and renovations, including kitchen and bathroom upgrades, new windows or roof roof, etc.
- Condition and age of the home’s plumbing, electrical, and HVAC systems
Step 3 – The Appraiser Comes Up With Their Estimate Of The Home Value
Remember – the goal of the home appraisal is for the appraiser to come up with an objective third-party opinion of the value of your home that is as accurate as possible.
Because of this, the appraiser will take into account not only the condition and attributes of the home, but also recently sold homes in the area. Ideally, they would be able to find properties in the same neighborhood of a similar size and with similar features that have sold within the last few months.
They will then use those other properties’ sales prices and make adjustments in value for any differences between the homes and produce a home appraisal report.
Step 4 – The Loan Terms Are Finalized
Based on the home visit and available sales records, the appraiser arrives at a professional opinion of the value of the property in today’s market.
The lender then uses this value – together with your income, assets, and credit history – to determine how much it will lend to you and at what terms.
What Appraisal Values Mean For You
Once the appraisal process is complete, your lender should be able to provide you with the final loan terms.
If the lender is deciding your loan amount as a percentage of the property price, it will choose either the sales price or the appraised value, whichever is less.
A High Appraisal
This means that if the property’s value appraises at or above the purchase price, you’ll probably get the loan amount you applied for.
For example, if the purchase price is $500,000, and the appraisal comes in at $550,000, the lender will likely approve the full amount of your loan.
(Plus, in this example, you’d also go in with a built-in $50,000 worth of equity, since your appraisal is higher than your purchase price. Woohoo!)
A Low Appraisal
If, on the other hand, your property appraises for less than the purchase price, the lender will most likely reduce the loan amount to match the value of the home according to the appraisal.
For example, if the purchase price is $500,000, and the appraisal comes in at $450,000, the lender will likely reduce the amount of the mortgage, which means you might fall short of the purchase price.
What To Do When The Appraisal Comes In Low
If the appraisal report shows that the property’s value is lower than expected, don’t panic. You still have some options, especially if you included an appraisal contingency in the sales contract.
If your contract indeed includes an appraisal contingency, and the appraisal comes in lower than the purchase price, you can walk away from the deal. Easy peasy.
Another option is to try to negotiate with the seller to reduce the sales price. Alternatively, if you’re able, you can put more money down to cover the difference between the appraised value and the purchase price.
Lastly, you can always dispute the appraisal, especially if a comparable sale in the neighborhood was not included or just popped up. In some cases, your real estate agent might be able to help you locate additional comparable sales to support a higher valuation and thus lead the appraiser to amend their report.
What Sellers Should Know About Appraisals
When you’re selling your home, it’s important to make your home look as good as possible – both to attract potential buyers and to maximize the appraised value.
As a seller, you want to make sure that the appraisal for your home comes in as high as possible. This ensures that potential buyers will be able to get the loan they need to purchase your home.
That being said, one of the most common questions we get from sellers is whether they need to order an appraisal before they sell their home. In almost all cases, our recommendation is no.
This is because each lender has its own preferred appraisers, and buyers may not trust your appraisal reports. Further, because the Oakland and East Bay markets are changing so rapidly, appraisal reports can quickly become outdated.
However, when the lender orders the appraisal, you can do your part to help boost your home’s appraisal value through things like…
- Patching any cracks in the walls, touching up water-stained walls, cleaning soiled carpets, and neutralizing any persistent odors
- Improve your curb appeal – make sure to trim overgrown hedges, touch up the exterior paint, and fix any broken exterior lights
- Itemize your improvements – make a list of repairs and updates you’ve made to the house, when they were completed, and how much they cost
- Share your local knowledge – if there have been positive changes in your neighborhood recently, including new schools or new roads – be sure to let the appraiser know
Need Help Navigating Your Next Appraisal?
If you’re looking to buy, sell, invest, or refinance your home here in Oakland or the East Bay, our team is here to help. We know how big an impact the appraisal can have on the overall success of your transaction, whether you’re the buyer or the seller.
We are intimately familiar with local neighborhoods and block-by-block nuances and can help guide you on competitive yet reasonable purchase prices.
We are also well-connected to local lenders and appraisers and can help you navigate the changing landscape, whatever your real estate needs and goals might be.
To get started, call or text us at 510.995.0035, or click here.
