First let’s back up and get a few things straight:

When a home is listed, the seller and their agent decide on an asking price. Buyers will then come and look at the home, and if they like what they see, they’ll submit a written offer with a proposed purchase price. Sometimes a buyer will offer less than the asking price, but in a competitive market like ours, that is a rarity. More often, the buyer will offer the asking price, or will offer more money in an effort to “win” the home. That’s all well and good, but if the buyer needs to secure financing (aka get a mortgage), they’ll need to pass the hurdle of the appraisal in order to proceed.

So, what is a real estate appraisal and how is it done?

An appraisal is the bank’s determination of a home’s value. The buyer pays for the appraisal, which usually runs around $400, as a part of their loan. It is done by an impartial real estate appraiser, and is usually based on two things: the value of similar homes in the area; and the physical condition of the home itself. The appraiser will first “do the comps,” which is real estate jargon for researching the various homes in that neighborhood. They’ll look at the sales prices of recently purchased homes that are similar to the one they’re appraising. Then, they’ll visit the house itself and assess the location, size (square footage, number of beds and baths), and physical condition, as well as any remodeling that’s been done.

An appraiser isn’t concerned with style.

The furniture, paint color, or decor is never on an appraiser’s radar. They’re only looking at the permanent features of the home.

A real estate appraisal is NOT a home inspection.

A home inspection tells a buyer how the home’s systems are working, and will uncover both small and large flaws in the home. A specially-trained home inspector does this after an offer has been accepted, but before the Purchase & Sale is completed. A home inspection doesn’t give a dollar value to the home, or to any potential repairs, and is even optional in many cases. But if a home is being bought with financing, a real estate appraisal is mandatory, and will determine a price for the home.

If the loan is backed by the Federal Housing Authority, they’re looking at more than value.

There are lots of loans issued by the FHA, and these are backed by the department of Housing and Urban Development (HUD); both are part of our US government. If a buyer is using a loan from the FHA, the government has separate standards from “conventional” (ie non-governmental) lenders. FHA appraisers are looking at value and certain standards for safety (the latter is not part of a conventional appraisal). They’ll appraise the value of the home with comps, just as any conventional appraiser will; then they’ll inspect everything from the heating system to the handrails on the stairs, assessing their quality (read here for the full rundown). If there are problems with any of these health and safety issues, the loan will not be issued until the seller resolves them.

The appraisal can affect the transaction.

An appraisal will limit how much money a lender is willing to give a buyer — if the home is appraised for much lower than the offer price, the buyer may not be able to finance as much as hoped. That’s why it’s so important for buyers to work closely with their agent to choose a realistic offer price. It would be a disappointment for all parties involved if the sale had to be renegotiated, or even cancelled, because of a low appraisal.

A low appraisal doesn’t have to be the end of the sale.

Liz and Ellie have worked with buyers who got a low appraisal, which can seem scary; but with some creative thinking and good negotiating, were still able to buy their home.

Do you have a question about appraisals, or anything else? Contact us. We’re here to help.

Want to learn about all of the aspects of the buying process? Read on!

The Offer The Purchase & Sale The Inspection The Title