How Does a Home Appraisal Work?

During most real estate transactions, it will become necessary to have a home appraisal done on the subject property. This formal process of evaluation is the most effective way to determine the current value of a home not only for a buyer and seller but also for the lender who is providing financing for the purchase or refinance. While the concept might not be initially confusing, there are several misconceptions about the industry that can make the process seem complicated. Understanding what the appraiser does and how their evaluation plays a role in your financing can make the transaction easier.

The Purpose of a Home Appraisal

As you may know, home values fluctuate because of a variety of factors including supply, demand and regional influences. A home appraisal is done to determine the current market value of a property. Since this value will be used by the lender to determine equity and loan-to-value, an approved, reliable appraiser must be hired to complete the evaluation. It is important to note that he formal appraisal report that the appraiser files when financing is being sought from FHA, FNMA and Freddie Mac, will be registered with the national database and kept on file for six months.

What to expect during a Home Appraisal

Upon your approval, your loan officer will order the appraisal from a separate third party appraisal vender. The appointment for the real estate appraiser to visit your property (or the property you’re looking to buy) is set by the assigned appraiser with you or the real estate agent.

Before the appraiser arrives

Remember - This is a formal evaluation of the home and property. There are some key things to be aware of to prepare for to insure  you receive an accurate appraisal for your home:

• Major repairs – like water damage, dry rot and broken structures need to be repaired. The appraiser will flag any major issues right away. Issues like a leaking roof and broken windows will need to be fixed before your lender will sign off on the appraisal.
• Health & Safety Issues – like open electrical sockets, visible mold, damaged railings will need to be restored to safety standards. Items such as a fire alarm and CO2 detector will also need to be present and in working order. 
• In-progress Construction – like holes in the walls, unfinished tile work, fixtures etc should be completed prior to the appraiser’s visit. 
• Excessive Clutter – should be cleared out of rooms, away from the walls and floors. The appraiser needs to be able to view the structure of your home. Normal furniture is fine and no one expects your home to be ‘spotless’ but it will benefit you if your home is neat and easy to view.

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When the appraiser is at the home

It is a best practice to make sure that you are present while the appraiser is at the house. Not only can you provide information when the appraiser asks for it but he/she can point out specific issues or considerations during the process. Understand that by law, your loan officer cannot be present during the appraisal and cannot speak to the appraiser. 

• Features – the appraiser will note key features regarding your home and property such as square footage, number of rooms, upgrades and outdoor factors such as a pool or view.
• Appearance – the appraiser will take pictures of your home both inside and out to give an accurate account of what your home looks like.
• Standards – to help keep the appraisal process as objective as possible, the appraiser will be evaluating your home based on accepted industry standards. For example: an enclosed room must have a built-in closet for it to be considered a bedroom. 
• Please Note - All construction permits must reflect accurate square footage to factor in to the appraised value of the home. A non-permitted room addition may not be valued the same as a permitted addition

After the appraiser leaves

After the evaluation is done, the appraiser still has work to do. There are several methods and formulas that go into the final value of the property but here are a few to be aware of:

• Comparable Sales – The real estate appraiser will assess other homes that have recently sold in the area. While no two houses are exactly the same, the appraiser will choose several comparable sales to include in the report, adding and subtracting value based on the features your house has that makes it different.
• Cost to Re-build – The appraiser will also consider how much it would cost to build the home in today’s market. Depreciation or appreciation is applied to this as well.

How the appraised value will affect financing

If the appraised value is at or above the expected value

In most cases, this is good news! The only time a higher appraisal value can cause issues is if there is too much discrepancy. For example: if you are buying a home for $250K but the appraisal comes in at $280K, the lender might question why the seller is willing to sell below market value.

If the appraised value comes in below expected value

This is what most sellers, and homeowners looking to refinance, fear.  Before you start thinking the sky is falling - make sure to talk to your realtor and loan officer to find out all of your options. 

Key Take Away

Hopefully, you now understand how a home appraisal works and why this is a vital piece of the mortgage process when buying or refinancing a home.

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