Everything You Need to Know About Appraisals
/Despite real estate appraisal being part of nearly every real estate transaction, I’ve noticed that many clients (and even some agents) have a lot of questions about the process and purpose of property valuation. Below, you’ll find some of the most common questions with answers that will hopefully clear up any misunderstandings!
Is the appraisal the same as a home inspection? No. The buyer hires their own inspector(s) to do a thorough investigation of the property’s condition and ensure that it meets their expectations. An appraiser is usually hired by the mortgage lender, paid for by the buyer, to ensure that the property value is worth at least what the buyer has agreed to pay. If a lender has agreed to provide a mortgage equal to 90% of the property value, they have to verify that the value is actually there in case someone defaults on the mortgage and they have to sell the property.
Some types of loans (e.g. FHA, VA, USDA) require appraisers to visually inspect the attic and verify that the utilities are functioning. Assume that you should have all utilities active unless your purchase contract specifies otherwise.
My lender told me I don’t need an appraisal. Why not, and should I get one anyway? Many lenders have automated valuation software that can provide a general idea of a property’s value; if you are making a substantial down payment or purchasing a property below market value, your lender may decide to waive the appraisal. It saves the buyer money and saves the lender time. If you’re worried about the value, don’t be — there’s hardly any chance that a traditional lender today would assume a property’s value without plenty of evidence. If they’re agreeing to lend you the money you need to buy it, just roll with it.
I just had my home appraised a few months ago for a refinance. Can’t we just use that report instead? Nope. Because property values can change over time, each appraisal is technically only valid for the date the property was evaluated. Also, appraisers must take the purpose of the appraisal into account when preparing the report, so it is not uncommon to see different values for refinances, purchases, divorces, etc. That might seem strange, but if you consider the lower risk of refinancing an existing mortgage for a homeowner who has already been making regular payments, it does actually make sense.
I want to make sure the appraiser gets the “right” value — what information can I give them? This depends on who you are, but first, please remember: it takes a shocking amount of time and work to become an appraiser, so they might not look kindly upon someone else telling them how to do their job. Also, there are very strict appraisal guidelines that detail exactly what information can and can’t be considered.
The lender is not allowed to instruct the appraiser and will usually avoid personal contact with them; this is to avoid the appearance of undue influence (which was definitely something that used to happen a lot before the mortgage crisis and subsequent new laws).
I encourage sellers to provide a list of any substantial improvements made during their ownership, especially during the previous 5 years. Knowing the age of the roof, doors, windows, siding, etc. is always helpful. Any additions or major remodeling would also affect value. If you want to share the cost of those improvements, feel free…but it doesn’t matter. What you paid doesn’t impact the value from an appraisal perspective.
Agents, please know that the appraiser has access to the same data you do in the MLS and public records! So while it may be tempting to leave comparable sale information for every appraiser, please don’t waste your time or theirs unless the property is especially unique or you’re aware of a reasonably similar home that might be missed during a standard comp search. One exception that might be made during very competitive markets is providing information on the number of offers that were received and the relevant details of those offers (all over list price, etc.). This might help justify, for example, a picture-perfect mid-century modern home selling for $100k over list price and at least $125k more than any other nearby home with the same number bedrooms and bathrooms.
Who can be present during the appraisal? The seller is always allowed to be present at their property, and the seller may require their agent (or the buyer’s agent) to be on the premises when any 3rd party is at the home. However, if you are present during the appraisal, let the appraiser do their thing — be available to answer any questions, but don’t follow them around. Pretend it’s a buyer tour and turn on all the lights, make sure doors are unlocked, and make it easy to access the major mechanics and the attic if necessary.
Can I get a copy of the appraisal? If you’re the buyer who paid for the report, absolutely. If you’re the seller, no. When the lender has approved the appraisal report, you’ll be notified whether it is “good” or not (in other words, did it meet the value in the purchase contract?) and whether there are any conditions — these are repairs that could be required by an appraiser to ensure the property meets the minimum standard for that type of loan.
The appraisal says the value is good, but subject to some repairs. Does the seller have to make the repairs or can they refuse? If they want to sell the property to this buyer, they need to make the repairs — and if they are unclear about any part of the conditions, definitely get clarification from the appraiser as soon as possible. However, a seller might decide that it’s too much work or expense. The buyer is usually prohibited from making any repairs to a property they are purchasing (unless they are already a tenant of the property, which is a fair exclusion in my opinion), but there’s technically nothing to prevent an agent helping out.
Can I appeal the appraisal if I don’t like the value? While there is a process to appeal an appraisal, there are many factors involved and the success rate varies greatly (based on a quick Facebook survey of Cincinnati-area agents I did last night). Some agents recommend changing lenders instead, which would usually prompt a new appraisal. Others have had luck by using the right language: “please help me understand” rather than “what on earth are you looking at”. From my experience, it’s always worth a try, but don’t get your hopes up — discuss backup plans to be sure you know what your best options are.
