Property Appraisal, Buying a Home, and Your Mortgage

When you are buying a home, a property appraisal is one of the last hurdles on the road toward a successful closing. Understanding the appraisal process and how it affects your home sale or purchase will help you through the waiting period as you prepare for and face this last step.

What Is a Property Appraisal?

An appraisal is an independent evaluation of the value of the property conducted by a neutral third party not tied to the sale of the home. Their job is to determine how much the home is worth, and report that amount to the Lender.

The reason for the appraisal is simple. The Lender doesn’t want to lend more than the home is worth. Lenders are only willing to loan what the home is worth in the current market. So, the appraisal has a direct effect on how much you would be allowed to borrow.

What Does the Appraiser Look For During an Evaluation?

When the home appraiser comes to the home, he will perform an essential evaluation to identify the home’s structure, age, and location. Unlike the inspection, which takes a detailed look at all of the home’s components, the appraiser is just looking to see that the elements are there and appear in good repair.

First, the appraiser is going to look at the external features of the home, including:

• Property site
• Quality and materials used in construction
• Roof integrity
• Foundation integrity
• Gutter and siding condition
• Parking area integrity
• Overall external condition
• Condition of the neighborhood

Next, the appraiser will look inside the home. They will look at:

• Number of bedrooms
• Total square footage
• Size of important rooms
• Number of and quality of appliances
• Overall condition of the interior
• Code compliance
• HVAC, electrical, and plumbing systems
• Health and safety issues
• Structural integrity

Finally, the home appraiser will look at comparable sales. Any additional features or structures that the home has that the similar sales did not have are factored into the appraisal. Sometimes, a home appraisal can get tricky. If there are homes nearby that sold for much less than your seller is asking, such as short sales and foreclosures, it could push the appraisal lower than you expect.

What Happens if the Home Appraises Too Low?

The most significant risk for both buyer and seller is if the home appraises too low. If the appraisal is below the contract price, the Lender will not loan the money for the purchase. The buyer and seller will need to renegotiate the sales price so that the contract amount is within the bounds of the appraisal.

If you feel that the appraisal value was incorrect, ask your real estate agent to pull the comparable sales in the same neighborhood. You can use those to submit a reconsideration of value to the appraiser who may reconsider the value of the home and give you a higher appraisal price. However,  the appraiser will have his/her own data to back up their valuation of the house.

The only other option is for you to renegotiate with the seller. You can offer to split the difference between the contract price and the appraisal with the seller, the seller can reduce the asking price, or you can bring some extra money to the table as a down payment to cover the difference. If none of these options work, the buyer and seller have the option to walk away from the contract without penalty.

In the end, an appraisal is someone’s opinion, based on current data, about the value of the home. The comparables can change, and a different appraiser could have a different view. However, once the appraisal value is reported to the Lender, there’s little recourse for you as the buyer.

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