If a mortgage loan is involved, then a home appraisal will most always be a contingency. Even for the rare cash buyer, the home appraisal contingency is likely going to come into play as a due diligence. After all, no one wants to overpay, and lenders often refuse to lend a dime over the appraisal value of the home. While necessary and a great protection for such a valuable asset, appraisals can be a headache for both the buyer and seller.
Appraisals Are Tedious But You Can Prepare Yourself For The Process
Want to know just how tedious the home appraisal process can get? Take the following recent transaction as case and point.
A home inspection showed a property value $10,000 less than asking. Good news for the buyer, and very bad news for the seller. That same home inspection also showed a hairline crack in the home’s ceramic stovetop, though. The buyer’s mortgage underwriter required “someone” replace it before a final loan approval would be granted. The seller refused, which left the buyer to create a repair escrow account for the replacement cost. Otherwise, the buyer would lose the home. That escrow money is tied up until the buyer takes ownership of the home and buys a new stove. Yes, this is just how tedious the appraisal process can become.
While there’s no way to tell you how to avoid all the minutiae that could possibility be ‘uncovered’ during a home inspection, knowing what to expect from the home appraisal process can help you stay calm and focused on the task at hand. It can even help you avoid some of the pitfalls.
Let’s breakdown everything you can expect about the what, why, and how of home appraisals. Along the way, we will explore some helpful tips to help the process go as smoothly as possible.
What Is A Home Appraisal?
The buyer has an estimated worth of their home’s value. The seller has a estimate value of what they’re willing to pay for a home. Both opinions are biased, however. What really matters is what the home is actually worth, or its fair market value.
The fair market value is determined by a licensed appraiser performing a home appraisal. This is his/her best and unbiased estimate, and it’s what mortgage lenders go by in determining how much they’re willing to loan on any particular property.
The licensed appraiser goes to the property and inspects it from door to door. The findings are compiled into a report, which will include an appraisal value. Again, the appraisal value may be congruent with the listing or offered price, but it can be several thousands of dollars in difference.
If working with a professional realtor, they typically recommend a fairly accurate listing price for their properties based on the comps in the area, the home’s specs, and any problem areas they find in their initial property assessment to list it. But, some homeowners don’t go with that recommendation for innumerable reasons. They may simply feel their home is worth more, or they may be upside down on their own mortgage and need to get a higher price to break even.
Still, feelings and need don’t matter in home values. The appraiser isn’t going to take such into consideration. The appraiser fully bases the numbers on the property itself. Understanding the above is the first step to having realistic expectations about the appraisal’s outcome.
In cases of a mortgage, the buyer’s lender will typically order and schedule the appraisal from their own chosen vendor. Like the appraiser, the lender has a singular goal in the appraisal, and that is to simply to determine how much money should be lent on a particular property. Very few lenders issue mortgages without an appraisal contingency.
Keep in mind that this is not the same thing as a home inspection. While a home inspection looks at the condition of a property, an appraisal is concerned with its value in relation to all applicable conditions.
How Do Appraisals Impact Buyers?
Considering a mortgage loan, a low appraisal can completely sideline or derail a home purchase. The lender bases the approval amount for a mortgage on the appraisal. If the proposed purchase price was higher than the appraisal, the buyer has three options:
Option 1: Back Out And Start Over With A Different Property
Real estate purchase agreements typically include several contingencies, including an appraisal contingency, inspection contingency, and financing contingency.
The buyer can use the appraisal contingency to back out of their offer should the property appraise under the sale price. A contingency is a condition that’s met before the purchase agreement transitions into a legally-binding contract.
In some cases, the seller is willing to renegotiate the price. After all, unless they happen upon a cash buyer, they’re likely to reencounter the same problem with the next buyer’s appraisal. But, there are some seller holdouts. They simply won’t budge on their pricing, meaning the contingency is your ticket to recoup your earnest money deposit and part ways with the home.
Option 2: Bring More Cash To The Table
Most lenders will be willing to issue the loan for the appraisal amount IF you can bring more cash to the table to make up the difference between the sale price and appraisal amount. So, if the house appraised at $200k, but the sale price is $205k, then you’d simply add another $5k to your down payment to balance the loan to the appraisal price.
Option 3: Ask The Seller To Lower The Price
If it’s a seller’s market with a flood of potential buyers and multiple offers on the table, then the owner may decline and wait for a different buyer willing to take the second option. However, it never hurts to ask the owner to match the appraisal price, and you may get that lower price if the market is sluggish or the house has otherwise been on the market for a long time.
How Does The Appraisal Work?
The licensed appraiser will look at everything about the property, particularly all areas that affect property value, including:
- Lot size and percentage used
- Area comps
- Workmanship of upgrades and additions
- Neighborhood characteristics
- Geography
- Zoning
- Access to public utilities
- Parking and vehicle storage
- Foundation type and condition
- Attic/basement space
- Construction materials – cabinets, walls, countertops, floors, etc
- Square footage and bed and bath numbers
- Evidence of pests
- Structural and physical integrity and livability
- General maintenance issues like paint, missing hardware, etc
- Amenities like a porch, pool, fencing, etc
- Major appliance age and condition
Basically, if it’s not a movable part, such as the owner’s furniture and clothing, the appraiser is going to examine it.
How Can Sellers Get Max Appraisal Value?
Here are a few tips to help the appraiser see your home in the best light, and we will also include some simple ways to increase the home’s value for the appraisal.
1. Knock Out Your To-Do List
You may think that selling and moving on to a new home moots the existing to-do list that’s been long overdue for your current home. Not so fast. It’s actually the perfect time to do all those minor fixes. If a doorknob or electrical outlet is missing, replace it. Touch up paint dings. Ensure sinks and toilets aren’t leaking. Spray for pests. Replace missing lightbulbs.
It all may seem like nitpicking chores, but each completed task is one less downgrade on the appraiser’s report.
2. Know Thy Competition
If you didn’t use a realtor, then you must make sure that your price is aligned with comp homes in your area over the past six months or so. It’s all in public property records for your access. Do keep in mind that you’re looking at homes in the same condition, location, and sizing vein as your home. You’ll also want to keep the seasonal ebbs and flows of the housing market in mind to the timing of your home sale.
3. Ask Yourself If Cosmetic Upgrades Are Worth The Risk
Cosmetic upgrades and major repairs are always a gamble. It’s a risk verses reward that only you can balance for your particular home and finances. Full remodels may work if you’re investing sweat labor and find yourself in a seller-friendly market. However, investing a great deal of money into a full professional remodel around selling time isn’t likely to be a recouped expense.
Focus on the smaller cosmetic upgrades, especially in any area that’s extremely dated or in disrepair. You can often DIY or hire non-professional labor, such as for fresh paint or fixtures. Switching to energy efficient items is usually a good move, too, if you need a replacement, such a new toilet, hot water heater, or HVAC system.
Note that certain additions and work will require a municipal permit. Make sure that you request and obtain any that apply and use licensed contractors if required. Any work without such can decrease the value of your home and tie you up in an expensive and length process to rectifying the non-permitted work with officials.
4. Bolster Curb Appeal
Yes, books are judged by their covers, and the condition of your home’s exterior speaks volumes to the buyer and appraiser as to what they can expect inside. Get them in the right mindset with the following:
- Manicured yard
- Clean lines (view) from the curb
- Clear gutters
- Solid roof
- Clearly defined entrance
- Clean windows
- No door squeaks
- No trip hazards
- No eyesores
- Adequate outdoor lighting
5. Keep Records On Everything You’ve Done
Records serve as verification for the appraiser, but they’re also the ideal way to showcase the DIY and professional improvements you’ve made and care taken in your home.
6. Keep It Clean
The last thing you want is an irritated appraiser that’s battling mess and disorganization to examine your home. Statistics show that clean homes rate higher in inspections than those viewed as dirty and unkempt. The bottom line is that deep cleaning will make things go much smoother and faster with your appraisal.
7. Don’t Micromanage
You and/or your realtor will likely be present for the appraisal. Make sure that all the documents and info is on hand that the appraiser may ask for – age of roof and appliances, year built, remodel and addition dates, contractor invoices, etc.
The goal is to be available from a distance. Give the appraiser the space needed to get the job done. Don’t offer more or less info than is asked if you.
Summing Up Your Home Appraisal
Home appraisals may end up neutral, benefiting the seller, or benefiting the buyer. It completely hinges upon the property being examined by the appraiser. In most cases, a home for sale isn’t going to avoid the appraisal process. However, understanding what it entails and how to present the house in the best light possible will go a long way in preparing yourself and home for the outcome.
