If you’re reading this article, there’s a good chance that congratulations are in order! If you’re a home seller, you have accepted an offer on your property. Or, if you’re a home buyer, you have successfully submitted an offer, and opened escrow. In the next week or so, you probably need a home appraisal. Here’s what you should know about home appraisals, and how they can affect a real estate transaction.
Home Appraisal vs. Home Inspection
The home appraisal and home inspection are two separate services. The appraisal is required by the lender, while the inspection is not required, but highly encouraged. Both the appraisal and the inspection are usually paid for by the buyer, at the time of service. You can also read more about the Cost to Buy a Home.
Home Inspection
The home inspection is conducted by a home inspector, who is hired directly by the buyer. The home inspection report is delivered directly to the buyer. Home inspections help the buyer to identify any potential issues with the property. The home inspection report can be used to help the buyer request repairs from the seller.
Home inspections are not required, but highly recommended. For more information about what to expect, read my article about Home Inspections.
Home Appraisal
The home appraisal is required whenever the buyer is taking out a mortgage to finance the home. The lender requires the home appraisal, to determine the property’s value. The lender ensures that the purchase price is appropriate, given the property’s location, condition, and amenities.
When you finance a home, the lender pays the majority of the purchase price. In case of foreclosure, the lender does not want to be stuck with a property that is worth less than what they have invested in it.
If a buyer is paying all cash for a home, an appraisal is not required. An all-cash buyer may still have an appraisal completed, to avoid paying more than appraised value for the home. (You can also read my article about Closing Costs for Cash Buyers.)
How Much Does a Home Appraisal Cost?
Appraisals in California usually cost between $400-$600 for most homes. The fee often increases for more expensive homes. This varies based on appraiser. Some appraisers increase their fee when a home’s value reaches $750,000; others keep their standard fee until a home’s value exceeds $1,000,000. I have recently seen a $750 appraisal fee charged for a home with an appraised value of $1,100,000.
Step One: Scheduling the Home Appraisal
As soon as the offer is accepted, the lender usually collects payment from the buyer, and orders the home appraisal. To ensure that the appraiser is unbiased, the lender does not contact an appraiser directly. The lender puts the order into a “lottery” system of licensed appraisers, that assigns one at random. The appraiser is given the listing agent’s contact information, and sets the appointment. It usually takes about one week from the time of the appraisal order to the appraisal appointment.
Step Two: What Happens During the Home Appraisal
In most cases, the listing agent, who represents the seller, meets the appraiser at the property. The listing agent can prepare a comparable sales report for the appraiser. This may be useful for an appraiser who is not familiar with the area, or who may not have the same information.
The home appraisal appointment usually lasts between 20-45 minutes. The appraiser takes photos of the property, and notes any obvious deficiencies.
If the property is a resale (not new construction), the appraiser will use the sales comparison approach to determine value. The appraiser looks at comparable sales, usually over the past 90 days. The appraiser also considers neighborhood characteristics, housing trends, and current market conditions. Appraisers typically use the Fannie Mae Uniform Residential Appraisal Report. If you’re curious about what it looks like, you can see it here.
VA and FHA Borrowers
If the home appraisal is for a VA loan, keep in mind that the VA has Minimum Property Requirements (MPRs), to protect the VA borrower. For example, the roof must not leak, and must have at least a couple of years’ use remaining. You can read more about VA Minimum Property Requirements. Effective December 1, 2016, the charge for VA appraisals is $600.
If the home appraisal is for an FHA loan, the appraiser also conducts a property inspection to make sure the home meets the Department of Housing and Urban Development (HUD) standards for health and safety. Any issues flagged by the appraiser will need to be repaired before the sale can proceed. The FHA Appraisal Guidelines were updated on September 14, 2015. Since this update, the appraiser must report if the roof has fewer than two years’ remaining life left.
Step Three: The Appraisal Report – What Now?
Value Is At or Above Purchase Price
In most cases, the appraisal comes in “at value.” This means that the appraiser determines that the property value matches the purchase price. When this happens, the sale continues forward as planned.
Home Buyers: If the appraisal comes in at ABOVE purchase price, the lender will not reveal the appraised value to the seller. The lender will simply inform the seller that the appraisal comes in “as-is, at value.” This assures the seller that there are no appraisal-related issues with the loan approval process. The buyer will enjoy knowing that he or she is buying a home for less than appraised value!
Value is Below Purchase Price
When the appraisal value falls below the purchase price, a number of things can happen:
- Seller can lower the purchase price. The seller may adjust the purchase price to match the appraisal value.
- Buyer can bring extra money to the table. Buyers can bring additional funds to cover the difference between the purchase price and appraisal value. This is most common when there are competing offers.
- A combination of #1 and #2. Most often, buyers and sellers work out a compromise, and meet somewhere in the middle. This involves some additional funds from the buyer, and a partial price reduction by the seller. For example, if the initial contract price is $500,000, and the appraisal comes in at only $450,000, buyer and seller may agree to split the difference. Seller lowers purchase price to $475,000, and buyer finances based on a $450,000 purchase price, and then brings an additional $25,000 to close escrow. The lender is satisfied with this agreement, because the mortgage is based on the $450,000 appraised value.
- Lender can appeal appraisal value. If it appears to the agents that the appraisal value is too low, the agents have the opportunity to appeal, by submitting comparable sales. Depending on the loan program, this isn’t always possible. Appealing the appraised value can also cost the buyer additional appraisal fees, and delay the sale.
- Buyer or Seller can cancel the sale. This rarely happens, since both parties want the sale to continue. It’s usually better for everyone to work out a solution together, than to just give up and walk away.
In some cases, the solution can be a combination of the first two.
The Bottom Line
In most cases, the home appraisal is just another hoop to jump through in the escrow process. It usually takes about a week to schedule, and then can take up to another week to receive the home appraisal report.
Real estate agents often call the home appraisal the “wild card” of the real estate transaction. The purchase price may not be finalized until that report comes in. The appraisal is usually a contingency of the purchase. If the appraised value doesn’t match the purchase price, either the terms may need to change, or the sale may be cancelled. Your real estate agent and lender should work with you to find a satisfactory solution.
Good luck! As usual, feel free to contact me with any questions.
