Appraisals

The purpose of an appraisal is to confirm the sales price for the lender.

  • Why do you have to have a property appraised?
    Lenders generally require a home appraisal before they will issue a mortgage.  They do this to protect their investment: if the actual market value of the property is lower than the sales price, and you default on your mortgage, the lender won’t be able to sell the property for enough money to cover the loan. Interested in a Property Valuation?
  • Inspectors vs. Appraisers:
    It may seem confusing that you need both an appraisal and an inspection.  But they are for very different purposes:
    • Appraisers evaluate the property to check whether the sales price is appropriate.  They focus on general condition of the home and recent comparable sales to come up with a dollar amount for the home.
      • Ask for a Copy: While you pay for the appraisal, it is done to protect the lender, not you the buyer, and the report is usually sent directly to the lender.  You can request a copy be sent to you as well, but it won’t happen automatically so you have to ask for it.
    • Inspectors are usually hired by the buyer to look for structural defects and document the physical condition of the home.  The buyer pays for the inspection and receives the report.
  • Appraisal Overview:
    • Cost & Time: It usually costs between $200-$750 for an appraisal, depending on your location. 
      • Some appraisers are very thorough and will spend hours crawling over a property, researching comparable sales, and writing a comprehensive report. 
      • A small number of less reputable appraisers will drive by the property, make a few notes, pull a list of “comps” from the database and fax in a report the next day.
        First American has some of the best appraisers in the business. Click here for more information on our appraisal services
    • Report: The lender receives the report.  You will get a phone call if the appraisal doesn’t at least match the selling price. 
    • Elements Covered: 
      • Square footage
      • Appearance
      • Amenities
      • Condition

      So a large 4 bedroom home in an area where mostly 3 bedroom homes have recently sold will have a higher value, and a house with peeling paint and a patchy lawn in a well-manicured suburb will appraise at a lower amount than otherwise similar properties..
  • High Appraisals:
    An appraiser is in a delicate position:
    • Often the lender hires the appraiser (or gives the buyer a short list of approved appraisers to choose from), the lender is the one requiring that the appraisal be done
    • The appraiser knows the sales price, and so knows how much the property needs to be valued at for the buyer to get a loan from the lender
    • If the property is valued at more than the loan amount, the lender knows they will make money even if they have to foreclose (since the value of the property when sold will cover the amount of the loan and the costs of foreclosure) and this makes it more likely the lender will issue the loan.

      In the past, this combination has sometimes led to inflated appraisals.  By the time an appraisal is ordered, a lot of people (buyer, seller, loan officer(s), real estate agent(s)) have invested time and effort into the purchase and want it to go through.  That can put pressure on the appraiser to deliver a valuation that allows the deal to happen.
  • Low Appraisal:
    If the property appraisal isn’t at least as high as the selling price, it can cause everyone to panic.  It is important to keep in mind that there are several options for the deal to still happen, here are the likely consequences:
    • Loan: the lender may require that the loan amount be reduced to match the value of the home according to the appraisal.
    • VA and FHA mortgages require that the property “appraise” for at least the selling price, so if it doesn’t, the buyer won’t be able to get a FHA or VA loan.
    • Offer: if you wrote your offer contract to include a contingency requiring the property to be valued at the selling price or higher, you can:
      • Walk away from the deal
      • Negotiate with the seller to reduce the selling price
      • Put more money down to cover the difference between appraised value and the selling price
      • Request another appraisal: the lender may send a different appraiser, or ask the original appraiser to review their report
      • Dispute the appraisal: find out what comparable sales were used and ask your agent if they are appropriate, often your agent will be more familiar with the area than the appraiser and can find additional “comps” to support a higher valuation

Print this Page