Buying a home can be one of the most exciting times in life, but one step in the home buying process strikes fear or uncertainty in the minds of buyers. It may scare sellers and real estate agents just as much. That is the home appraisal. More than likely the reason for the fear is that the appraisal report could kill the whole purchase. Since the appraiser cannot communicate with or be influenced by the buyer, the next few days may cause some stress. Although, much of the appraisal worries may be overcome simply with a better understanding of the appraisal. Therefore, we feel it is important for buyers to know the answers to some of the most popular appraisal questions.
- What is an appraisal?
- How much does an appraisal cost?
- What if my appraisal comes in low?
- How does the appraisal process work?
- What happens if there are appraiser required repairs?
- How long does an appraisal take?
- Who orders the appraisal?
- Do I need a home inspection since I am getting an appraisal?
What is a Home Appraisal?
The first purpose of the appraisal is to determine an estimated value for a piece of real estate. Also, it must be performed by a licensed real estate appraiser (at least when a mortgage is involved). Even if it is a cash sale, it is highly recommended to use a reputable, licensed appraiser. Depending on the expected property use and loan type, the three main types of market value provided may be the sales comparison, cost approach, and income approach. In addition to value determination, the appraisal report offers other valuable information to a buyer and the mortgage lender. As soon as the appraisal is complete, practically everyone wants to know the same two things. Did it appraise for enough and are there required repairs? However, it is essential to read the other key areas of the appraisal related to the following.
What is in a Home Appraisal?
- Market value
- Property condition
- Neighborhood characteristics
- House size and amenities
- Recent comparable sales
- Sales history
- The estimated cost to rebuild – insurance purposes
- Legal information – deed, property tax, flood zone
- Cost to rebuild
- Estimated rental income (if a rental property)
At first glance, a 30+ page appraisal report may be very intimidating. Although, once it is broken down and explained by an experienced mortgage loan officer, it makes more sense. In the report, the above areas are broken down in much detail. Plus, this information provides a ton of valuable information to a buyer.
How Much Does a Home Appraisal Cost?
This is a common question, and it is tough to have an all-encompassing answer for many reasons. Every property and situation is not the same. Some scenarios require more work on the appraiser’s part, which means a potentially higher cost. Many variables affect the appraisal cost.
- Local market appraiser charges
- Direct appraiser vs. appraisal management company
- Rental comparable appraisals cost more
- Uniqueness of property
- Property type
- Property size
- Rural area (limited comparables)
- Rush order
Home Appraisal Cost Range
As shown by the list above, providing an appraisal cost is a loaded question, but for a typical primary or secondary home purchase, expect to pay a range of $450 – $650 for an appraisal in most markets.
Although, we recently saw one appraiser that charged $1,000. The reason is that the property is very rural, a rental property, and minimal market rental information was available for comparison. Therefore, no less than ten appraisers turned down the appraisal request. Although, one appraiser would do it if the buyer agreed to a $1,000 fee. The buyer agreed, and it closed. Keep in mind; it is pretty unusual for appraisals to cost this much.
Figure potential add-ons:
- Proving market rent $150
- Rush order $50 – $150
- Manufactured home $50 – $150
- Rural (limited sales) $50 – $150
- Unique property $50 – $150
- Property size $100 – $200
Again, each appraiser is different. Depending on the market, appraisal company, and demand in the market, the costs can vary widely. Fortunately for buyers, lenders must disclose the estimated appraisal cost up-front. Unless the appraiser provides new information, the lender must stick to the estimated cost and cover the extra amount. However, if the appraiser provides new information and/or reasoning for the need to charge more, the lender must redisclose the new cost (in writing) to the buyer. Otherwise, the lender must eat the extra cost.
What if My Home Appraisal Comes in Low?
For a buyer (and everyone else too), this is probably the biggest fear. Once the appraiser has viewed and measured the home, compared the home to recent sales in the area, and prepared the report, sometimes the final figure does not meet the purchase price. A lower appraised value may even be expected in a hot market. In these cases, housing inventory may be so low, and prices are increasing so fast, buyers are willing to pay over appraised value.
When the appraisal comes in low, there are a few basic options for the buyer. If using a realtor, the realtor will communicate the buyer’s desire to the seller.
5 Buyer Options for a Low Appraisal
- Lower the price to the appraised value
- Buyer brings the difference between price and appraised value to closing
- Lower the price somewhere between the price and value
- Cancel the contract
- Switch to a renovation loan
I know, most are going to say, “Why would a renovation loan save a purchase with a low appraised value?” This is potentially a very creative solution. In some cases, a particular home improvement could increase the value more than the renovation cost. Therefore, it could make up the difference. Another great renovation solution is that an FHA 203k loan will lend 110% of the value. Just adding a small renovation for about anything could make up the appraisal shortage. Plus, some desired improvement is included as well!
How Does the Appraisal Process Work?
In 2009, several agencies created a process called Home Valuation Code of Conduct (HVCC). The primary purpose of this rule is to provide a more reliable appraisal process without lenders or real estate agents influencing the value. Before this rule, lenders could request an appraisal from their favorite appraiser directly. Post-HVCC, lenders must use a system of randomly choosing appraisers from a list or through an appraisal management company. Below is the basic appraisal process.
- Lender submits an order to appraiser list system
- Purchase contract & other supporting documentation provided
- Appraisers decide to reject or accept the order
- An appraiser accepts the order
- Appraiser schedules appointment with listing agent
- Appraiser makes a physical inspection of the home **
- Research of the local market for comparable sales
- The appraisal report is prepared
- Appraiser submits the appraisal to the lender
- The lender must provide a copy of the appraisal and acknowledgment of receipt form to the buyer
**Physical inspection of the home includes taking photos, measuring, notating features and issues.
Once the appraisal is received, the lender typically provides the report to the underwriter on the file. Also, the loan officer is available to discuss the appraisal with the buyer.
How Appraiser Required Repairs Affect You
Typically, a buyer’s goal is for the appraisal to come in “as is.” There is one line near the bottom of the appraisal which states if the home is considered “as is” or “subject to.” The term “subject to” means the appraiser requires something. Usually, the requirement is a repair of some kind. Repairs must be completed if a mortgage is involved other than a renovation loan.
Once the buyer is notified of the appraiser required repairs, often these are the options:
- Request the seller to complete repairs
- Buyer pays for repairs
- Realtor pays for repairs
- Renovation loan
- Back out of the contract
Occasionally, the first two options are accomplished by a lender creating an escrow holdback. An escrow holdback creates a temporary account to hold sufficient funds to complete the repairs. The best part is the repairs are completed after closing. An escrow repair or renovation loan is a great solution for repairs. Especially true for foreclosure sales. Often foreclosure sellers do not complete or allow repairs.
In cases of appraiser required repairs, the buyer, loan officer, and the buyer’s agent should discuss options.
How Long Does A Home Appraisal Take?
This is another loaded question. It depends on the appraisal complexity, appraiser order quantity, travel distance, and the appraiser’s speed. These days it is possible to receive an appraisal within just a few days. A rush request and possible fee could increase chances of this turnaround. The normal expectation is one week. However, it is not uncommon for appraisals to take up to 2 weeks. Other than requesting a specific turnaround, lenders have little control of the appraiser speed, but check out ways a seller could increase the appraisal process speed.
Who Orders the Home Appraisal?
The answer depends if there is a mortgage involved. If a cash purchase, anyone may request the home appraisal. Technically, an appraisal is not required on a cash purchase. Although, it is a good idea to confirm the value. But, the HVCC is very specific in this area when a mortgage is involved. As stated earlier, the lender must order the appraisal through an unbiased system. Thus, the buyer has no control of the home appraisal request. So, if a buyer orders an appraisal, lenders may not use it.
Do I Still Need a Home Inspection?
Many assume an appraisal does the same thing as a home inspection. Not true. Even though an appraiser includes property condition, it is not a full home inspection. On this site, we have a good article which expands on the appraisal vs. home inspection comparison. Check out, “Myth buster: A VA appraisal is not a home inspection.” Remember, it is recommended to request a home inspection.