As a residential realtor, you’re no stranger to the appraisal process.
A fundamental aspect of the home purchase journey, appraisals are primarily conducted when buyers and sellers enter into a purchase agreement or when homeowners seek to refinance their home.
Home appraisals seek to determine a home’s true value.
This is mainly for the purpose of the mortgage lender, who is providing the loan to property buyers. Lenders need qualitative assurance that the property is equal in value to the agreed-upon purchase price.
A lender wouldn’t provide a $900,000 loan for a $400,000 property. And in an era of overbidding, paying over asking, and steep competition within the housing market – appraisals may be an extra layer of complication to an already cutthroat time in the industry.
Therefore, let’s break down just what an appraisal is, what goes into it, and how you can best prep your buyers and sellers for its place in the process.
In this quick guide, we’ll show you:
Home appraisals are meant to determine the overall value of a home.
Knowing the value of a property helps validate the legitimacy of a purchase offer, as well as provide qualitative proof of collateral for the refinancing process.
A home appraisal is performed by an impartial third-party state-certified or licensed appraiser so that the overall appraisal report can remain objective and not move to benefit either the seller or buyer unfairly.
Home appraisals examine the exterior and interior of a home, looking into everything from square footage and bedroom and bathroom count to the overall quality of the structure and where repairs may be needed. If the home has gone through remodels or additions since the last appraisal, these are documented at this time.
Additionally, home appraisers will research comparable properties in the area and what they sold for, as well as relevant market trends that could sway the overall fair market value.
At the end of the appraisal process, a home appraiser must submit an appraisal report.
Not only does this report contain the findings and observations found through the above processes, but it also incorporates street maps, building sketches, property photographs, and additional information such as property tax records.
While reporting structures may differ across lenders, one of the most commonly used is the Uniform Appraisal Report from Fannie Mae.
Appraisals are a necessary aspect of the property-buying process. They ensure fairness on all sides while paving the way for a complication-free closing.
But they don’t come cheap.
According to the National Association of Realtors, the average price for a home appraisal is $500; however, this number can shift based on property location and size, among other factors.
In a 2023 survey, the NAR found 20% of home appraisal costs landed between $600-699, with 8% at $800 or more. Overall, 86% of home appraisals cost $400 or more.
Appraisals also don’t happen overnight.
2023 held an average 11 calendar day wait time, down from 2022’s average of 14 calendar days. This is after the acceptance of a home contract.
While appraisals are covered by the buyer, both the buyer and seller are hoping for similar outcomes. If a home’s appraised value meets or exceeds the purchase price, typically, the sale can continue as planned.
However, if the appraised value does not meet the purchase price, this discrepancy is called the appraisal gap.
If your clients are unsure of what this is – they aren’t the only ones. The NAR reports that 44% of 2023 survey respondents report most or all of their clients don’t understand exactly what an appraisal gap is.
But this colossal rock in the process is necessary education for buyers, as it can drastically upend their path to purchase.
Lenders won’t cover this gap, so if buyers wish to continue forward with the purchase and the sellers will not lower the price to meet the appraised value, that chuck of change is now on the buyers.
Which can naturally be tough for many as they’re already on the hook for a significant down payment (and other fees in addition to moving costs).
In fact, buyers being unable to cover this gap led to one of the top reasons transactions fell through due to appraisals in 2023 (48% in 2023 alone, up from 35% in 2022).
Other reasons transactions have fallen through post-appraisal? The NAR reports 59% is simply due to the appraised value, while 48% is due to the seller refusing to adjust price.
Therefore, with all that’s riding on an appraised value – there are steps you should take with your buyers and sellers to prepare your property and try and achieve the most optimal outcome.
Unsure how to proceed? We’re here to help.
Appraisals are rooted in multiple factors; however, there are a few proactive steps you can actively take to showcase a property in a positive light and make the entire home appraisal process a little bit easier.
Think of it just like creating a listing. You do everything you can to highlight a home’s beauty, functionality, and benefits to a potential buyer.
You can take similar steps prior to an appraisal – especially if representing a seller.
You’ve already done the heavy lifting to stage, clean, and tackle big repairs prior to listing. Think of your appraiser visits as the last lap.
While most of the work will reside with the seller, you can still aid your buyer in making the most of an appraisal.
Hopeful refinancers are in a similar position to sellers. They need to ensure they get a high appraised value for their property and that this number hasn’t slipped since their last appraisal.
The higher the number, the more eager mortgage lenders will be to make a deal. This opens up the option for better rates and optimal offerings.
It’s messy, and it happens. More than you think.
In fact, a top reason why home transactions fell through in 2022 was due to appraiser error (a whopping 39% due to lack of knowledge or in using inappropriate comps).
So, if a home appraisal comes back that you don’t agree with – stay calm. It’s very possible to challenge as well as get another opinion.
First step? Reach out to your buyer’s lender. Point out the identified errors (with documentation on what the information should be), and formally request a new appraisal.
Remember, don’t let your emotions or opinions cloud your judgment here. Present the facts and research professionally – and in writing.
A few key areas to double check?
By now, you know being informed is the name of the game in real estate.
Doing your homework will take away the surprise factor from appraisals, but it will also drastically help when you go in for the initial offer as well.
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