Love Selling Your Home Series: What’s an Appraisal and Why Does It Matter?

What’s an Appraisal and Why Does It Matter?

This series, Love Selling Your Home: Minimize Your Stress, Maximize Your Profit, is a step-by-step guide that covers everything you need to know to sell your home in today’s market, from finding a real estate agent to all the way to settlement day.

Just because your home is under contract doesn’t mean it’s time to celebrate just yet. It’s time for your home to be appraised if you buyers are getting a loan, and the results could sidetrack the entire transaction.

This is an important step in the closing process. The sale of your home can’t move forward until the appraisal is done and the lender has given its stamp of approval.

You don’t want the appraised value to come in lower than the contract price.  If so, the lender won’t approve a loan for more than what the home is worth. That means that the price you’ve set for your home is not going to happen!

Now is a good time to understand this process and know what you can do to protect yourself as a seller: 

Home Appraisal 101

What is an appraisal? An appraisal is an unbiased professional opinion of a home’s value that the lender will use to determine if they will lend money to the buyer of your home.  Usually, the lender will order the appraisal but the borrower will pay for the report.

Don’t confuse this with a home inspection, which is entirely different. Appraisers are not home inspectors looking for leaky roofs, testing appliances, etc. Your buyer will need to get a home inspection after the appraisal comes through.

Why does it matter? The lender wants to make sure the buyer is not over borrowing and that this is a sound investment for them in case the buyer defaults on the loan. The lender also wants to ensure that this home exists and is habitable.

If you’ve got an all-cash buyer, you won’t have to deal with a bank or appraisals at all. That’s a big plus as a seller.

What does it entail? An appraiser will tour the home and make notes about how it compares to other homes that have sold recently nearby. A licensed appraiser’s report is much more detailed than a comparative market analysis and is the only valuation report a lender will use.

The valuation is based on market trends, supply and demand, duration on the market, and considers any extenuating factors such as upgrades or something like being on a higher floor or end unit.  It also will take into consideration the home’s condition, location, and features.

The report also will include statements on any issues that may hurt or help the property’s value.

Since it’s never an “apple-to-apple” comparison, the appraiser will adjust the appraisal for some features of a home — a finished basement, a coveted view, updated appliances or HVAC systems. Remember, some improvements don’t add as much value as you would like … such as a new half bath, landscaping, etc.

For a condo unit, an appraiser will consider the number of units in the condominium community, how many are on the market and how many were sold.  The most weight is given to units that have sold in the same building since buildings are so different, even in the same neighborhood.

Be Aware of Appraisal Law

The appraisal process went through a change a few years back when the Home Valuation Code of Conduct was passed. This law was meant to make appraisers more independent and not “hired” by the real estate agents, buyer, seller, or bank handling the transaction.

But in some cases, appraisers may not be local to the area where they were appraising homes, especially when appraisal management companies are involved.

There’s been some questioning of how well these appraisers know the neighborhoods and the “true” value of a home when an appraisal comes in too low.

What Can You Do to Protect Yourself?

• You want to have an appraiser who knows the local area and has worked in your neighborhood beforehand. This is someone who could recognize any skewed comps if that’s ever the case.  Make sure your lender is working with such appraisers.
• As a seller, you could get an appraisal yourself before you even list your home to help you determine the asking price.  You could give this prelisting appraisal to the buyer’s appraiser to add to the data and perspective of the final report.
• You should question a low appraisal to make sure nothing was overlooked or inaccurate in the report (see more details below). 

What If You Get a Low Appraisal?

If an appraisal comes in lower than the contract price, it may mean the end of the sale with this buyer. However, there are steps you can take to help avoid this and to also move the sale along.

It might be worth the time to work with this buyer rather than start all over again, but you just might have to do that if many of these actions below don’t work.

Provide details on any home improvements to the appraiser so nothing is missed. Your agent can contact the lender so they can connect with the appraiser who is hired to evaluate your home.

Ask to review the appraisal to see if any adjustments were made, especially if you submitted information to the appraiser. A lender must comply with the request within 30 days.

Appeal the appraisal for a reconsideration of the value of the home. Provide the comparables you and your agent think represent the home’s value better and why.   You will need to show any discrepancies between the appraisal and any improvements or unique features of the home.

Ask for another appraisal, but you would have to pay for it. However, if it’s an FHA loan, an appraisal stays with that home for 6 months so you can’t ask to switch lenders or get a new appraisal. Buyers, on the other hand, could switch lenders and start over with a new appraiser.

Ask the buyers if they are willing or able to pay for the higher contract price and make up the difference themselves. Some buyers may be willing or able to make a larger down payment. If it’s a tight market, the buyers may feel the pressure to pay since there could be another buyer in line who is able and willing.

Renegotiate with the buyer and to offer a lower price or pay for closings costs. If you don’t have any other potential buyers, you may need to make such accommodations so that the sale does go through.

The appraisal part of the under-contract phase is crucial to making sure that you get the price you think you will and you make it to settlement.  I do something most agents do not—I meet the appraiser at my seller’s home and give them a packet full of information about why this home should appraise, including a list and cost of improvements that were done to the property, a list of comps to support the price, and even information about how many offers we had and why we chose this offer. 

This is the kind of extra steps I take to make sure my sellers get the most out of their home with the least amount of hassle.  I’d love to help you do the same.  Email me and let’s set up a time to meet to see if we are a good fit for selling your home.  Be sure to contact me (link to email me) a few months before you want to get started, as my listing schedule fills up quickly!

Stay tuned for next week’s article of my Love Selling Your Home series — Pre-Closing Tasks to Check Off Your List. It will provide a handy checklist to make sure you get it all done and even tell you what to expect from the buyers (such as an inspection).