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What Is a Home Appraisal and How Does it Work?


Selling your home to a buyer who is using a home loan? You’re going to need a home appraisal.

The home appraisal is a vital step for buyers who are using a lender, because the lender will not loan more money than it believes the home is worth. If you overprice your house, the lender can deny the loan, or only fund a certain amount. This can cause the buyer to back out of the sale.

Pricing your home is perhaps the most important part of a home sale. It’s also one of the most difficult aspects of the entire for sale by owner (FSBO) process. If you’re struggling to find a buyer, then there’s something wrong with your marketing strategy.

What Is a Home Appraisal?

A real estate appraisal is a professional valuation of a home. It takes place after you approve your buyer’s offer. The appraisal is the linchpin that determines whether or not the loan amount specified in the offer should be approved by the buyer’s mortgage lender.

How Does a Home Appraisal Work?

In most cases, your buyer’s mortgage lender will order the appraisal and an appraiser will contact you to schedule an appointment. It’s in your best interests to have the appraisal done as soon as possible so you can get the results and continue on with your deal.

When the appraiser comes over for your appointment, their goal is to examine the quality and condition of all the elements of your property. Though they will note any repairs that need to be made for the sake of adjusting the value of the property, their role is not to come up with a list of fixes. That part of the sale takes place during the home inspection.

» Learn more: Read this BEFORE your home inspection

What Do Appraisers Look For?

🏠 Structure, style and foundation
This includes things like your home’s architectural structure, foundation, and roof. They’ll take notes on the quality and condition of each; the higher quality materials used and better condition, the more money your home will be appraised for.
🎨 Interior condition Inside your home, the appraiser will once again check out the material and quality of the flooring, walls, ceiling, windows and doors. They’ll also take a look at your appliances and will note any issues that require repair.
🌴 Exterior condition Your outdoor space has a major impact on what your home is worth and the size of your home’s lot will play a big role in your home’s overall value. Also considered are things like landscaping, built-in lawn maintenance items like sprinkler systems, the materials and quality of any fencing and so on.
💵 Upgrades & amenities This category includes everything from central AC to an in-ground pool. In addition to an amenities your home has, the appraiser will also consider any upgrades you’ve made to your home – which is to say any work you’ve done to improve it since you bought it.
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There are a few things you can do prepare your home for an appraisal, including:

  • making any needed repairs
  • maximizing your home’s “curb appeal”
  • pointing out neighborhood amenities to the appraiser (parks, great schools, etc.)

It may be difficult to figure out what kind of repairs you need to make. You don’t want to go overboard and spend months repairing every detail, but you do need to fix the things that will turn off buyers. A good real estate agent will be able to tell you what kind of repairs you should spend your money on and what things you can let go.

To get the most money out of your home sale, you want to set your price right and only spend money on necessary repairs.

Who Orders the Appraisal in a Real Estate Transaction?

The buyer’s lender orders the home appraisal. This is the only appraisal the lender will use. You can order your own home appraisal to help you set a price for your home, but there are laws preventing the lender from using your appraisal.

Potential Appraisal Outcomes

There are two basic outcomes than can occur:

  1. Your home is appraised at or above the agreed upon sale price outlined in your purchase agreement, meaning the sale can move forward.
  2. Your appraisal comes in at less than the agreed upon sale price outlined in your purchase agreement. If this is the case, what happens next?

What to Do if the Appraisal Comes Back Low

If you hear back from the appraiser and learn that your home has been valued at a lower amount than your agreed upon sale price, don’t worry. The lender isn’t going to provide more money than the appraiser feels the home is worth, but you still have a couple of options.

Negotiate With the Buyer

If the disparity between the agreed-upon sale price and your appraised value is small, consider working out a deal with the buyer. If you know that he or she fell in love with the house, you might be surprised; the buyer may be willing to come up with the additional money out-of-pocket.

» MORE: Read this Before Waiving Your Appraisal Contingency

Request a Second Appraisal

If you believe your appraisal was done improperly, you can always dispute it and request another one from the mortgage company or pay to have a second appraisal done yourself. It is possible that a second appraisal will come back closer to your originally agreed-upon sale price.

Lower Your Price

If your appraisal comes back low, then it may mean you overpriced your house. This can cause problems, as the buyer may feel like the home isn’t worth the price tag. And if they have an appraisal contingency, they can back out of the home sale, requiring you to find a new buyer. Instead, you can negotiate with the buyer to lower your price so the lender will approve the loan. But you also may want to take some things out of the deal. For example, if you were helping with closing costs, you might want to withdraw that assistance.

Negotiating with a real estate agent can be tricky, and you should have a good agent in your corner.

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