Zlatan Hodzic of United Home Loans walks us through the basics of home appraisals
As a first-time homebuyer, you have a lot of things on your plate to keep track of. Unfamiliar terms and industry abbreviations can overwhelm you pretty easily and it’s our job to help you get educated and keep making progress. This article will explain the appraisal process to you – what it is and what it isn’t – and why you are probably going to need one.
What is a home appraisal?
Simply put, a home appraisal is an independent evaluation of the home you’re planning to buy. Appraisers are licensed at the state level and cannot have an interest in the property. This is because they need to be totally unbiased in determining the fair market value of your future property and cannot be financially – or otherwise connected – to the buyer or seller.
The lender wants to verify that if they are loaning you $200,000, the house is worth at least that amount. For this reason, the lender chooses the appraiser who will be taking a look at your future home’s value. Hiring your Aunt Jane who loves you and really wants to see you buy your first home may not be exactly what the bank, who is lending you hundreds of thousands of dollars, had in mind. The appraiser will be a true independent reviewer.
What does an appraiser look at?
An appraiser looks at a number of factors to determine the value of the home, including the following key components:
Home size
The size of the home plays into the value of the home, as you might imagine. A home that’s 1,000 square feet is typically going to be appraised for less than a 3,500 square foot home. But it’s not just overall square footage that is important. The appraiser will take into account the total number of bedrooms and bathrooms as well as the functionality of the spaces. This means they’re definitely going to notice if the kitchen is in a bedroom or that “living room” is actually in a garage.
Home value
This component may seem obvious but what’s not so obvious is that the value can be determined by a number of different factors. As the appraiser does research, and walks the property, they’ll notice things like repairs that may need to be completed or appear to have been put off. A perfectly functioning home will score higher than the same home with a large crack running down the hallway floor for example. When you know this ahead of time, you can start noticing details of the homes you look at long before you put in an offer. As much as the bank wants to ensure the house is worth the price you’ve offered, you also want to make sure the house is worth what you plan to pay!
Neighborhood
Location, location, location has always been important in real estate. Not only will the appraiser take a look at the neighboring properties and their condition, he or she will also run “comps”. Comps is simply an abbreviation for comparable – meaning the comparable sales that have occurred in the same area you are hoping to buy. Typically, comps are pulled from recent sales – what happened with the neighbor’s house a year ago is likely no longer relevant. The comps need to reflect current market conditions to be an accurate assessment of value.
If there are ten homes in the area that are similar (comparable in size, age, condition etc.) and they have recently sold for $150,000, you’ll likely have a problem trying to close on the home you want to buy if the seller is asking $250,000. This is why comps are so important.
Year built
A home built in 2015 will, in theory, have less repair and maintenance concerns than a home built in 1932. For that reason, an appraiser will take the age of the home into consideration when establishing a value. Age might come into play for something the appraiser notices like old electrical wiring that will probably need to be upgraded in the near future because it doesn’t meet current safety code requirements. It wouldn’t be comparable to a home built last year that likely wouldn’t need any adjustments to meet today’s standards – so the value is adjusted accordingly.
Miscellaneous factors
That busy highway just a few feet outside the front door? You guessed it, that might play a role in your appraiser’s valuation. Depending on what the appraiser sees as a red flag, there may be some miscellaneous notes in your report. Perhaps that busy road won’t appeal to many potential buyers. In that case, the appraisal will reflect a lower price than the same home in the neighborhood that isn’t near the road.
Even if you think there may be some miscellaneous factors, don’t stress. Appraisers are highly regulated and maintain strict standards when evaluating any property. Wait for the report and go from there!
Are home appraisals required?
Do you need a home appraisal? Just in case you’re wondering if it’s required, it is if you’re not buying your property with cash. The house you are buying is the collateral for the mortgage loan you are receiving from the lender. For that reason, the bank or lending institution has a right to ensure the asset matches up with the loan amount.
If you’re getting a mortgage: yes
There’s really no point in arguing about the appraisal – if you plan to buy your home with a loan, you’ll be getting an appraisal before you can close.
Since it is likely inevitable, it’s smart to start saving early for the appraisal, and other fees you’ll be asked to pay for. The good news is, it’s relatively inexpensive in relation to some of the other costs of a home purchase.
Since the lender gets to decide who is doing the appraisal, you may not have much room to negotiate the cheapest appraiser but remember, it’s a highly regulated industry so you shouldn’t expect any dramatic price differences between companies.
What may affect the cost is the size of the home, location and the area you live in. As you might expect, appraisers don’t necessarily charge the same in Texas as they do in NYC.
How much does a home appraisal cost?
Expect to pay more than $300 but likely not over $800 – even with the few different factors we’ve listed here. If you want to get a better idea of the exact amount, you can start with your realtor who should be able to give you a realistic idea of what you will pay.
Who does the home appraisal?
It can be an independent appraiser or an appraiser who works for a large firm. They’ll stick to the same guidelines no matter what type of agency they work for and your job is simply to pay the bill since the lender chooses the appraiser and the seller has to make sure they can access the property.
You will have the opportunity to review the appraisal, either through your realtor or by requesting a copy directly. The report itself will detail all the different areas in the home, points of major concern, the comps that were used to determine the value and of course, the value they have decided to place on the property. The appraisal will likely give you a lot of information about the home you are planning to buy and you may find it interesting to review.
What happens if your home comes in undervalue?
One concern homebuyers often have is that the appraisal comes in below the agreed upon purchase price. For example, you have a contract on a house for $299,000 but the appraisal comes back and values the house for $275,000. Although this can seem like a scary situation, it actually may be a great opportunity for you in the long run.
Typically, there are a few options if you receive an appraisal that’s less than the purchase price. First, you can request a review of the appraisal. If you feel there is a material error or that the appraiser used comps that were too low (when higher options were available), a review may be the right option. Your realtor should assist you by pulling comps that help your case, if you believe that to be the problem.
Challenging the appraisal
If you choose to challenge the appraisal, understand that it may not change the results. As we’ve said, this is a highly regulated industry and if they’ve done their job right, a second appraiser will likely get the same result as the first. Use this option only if your realtor and other professionals that are helping you with your home purchase agree there was something that went wrong.
Making up the difference
A second option is to make up the difference in cash. The lender won’t lend you more than the house is worth but you can pay down the difference with your down payment. Use this option cautiously because an appraisal is typically a fair assessment of value. No matter how much you love the home, it’s not worth buying something overpriced that you may be stuck with down the road or have to take a loss on if you need to sell.
Going back to the seller
The third option is to go back to the seller. If the appraisal indicated items that needed repair, it’s possible the seller will complete those repairs if they are motivated to sell the property. It’s also possible that they will agree to lower the sale price to meet the appraisal, which is a great opportunity for you to get the home of your dreams at a lower price than you offered to pay!
Home appraisals vs. home inspections
During the home buying process, you’ll also have a home inspection done on the property. Although it may sound like the same thing, a home inspection is not the same as an appraisal.
Think of it this way – an inspection looks at the home from a technical perspective and is designed to help the buyer, aka you, understand the condition of the home. It’s important to know if you have cracks in the foundation or moisture in the walls because those problems could soon become your headache if you close on the home.
The appraisal, on the other hand, is designed to help the lender understand the value of the home. Because one is looking from a buyer’s perspective and one is looking from the lender’s perspective, both are important! Just like the appraisal, the inspection report will tell you a lot about the home, including the condition and any areas of concern. Take the time to review both reports once you receive your copies.
If you’re just getting started on your home-buying process, we realize it can be a little overwhelming to save for all the upfront costs. That’s why we started Digs! Not only can we help you get educated on things like PMI, down payment options, appraisals and assistance programs, we can also help with the dollars you’ll need to do it all! Our savings program is an easy way to set money aside on a regular basis. We know you don’t need one more thing to worry about so our system is automated.
Not only will you be saving for the appraisal, but you’ll also be saving for all the different costs associated with buying your first home. To learn more, click here and get started! We can’t wait to help you along your home buying journey!
