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A home appraisal assesses the market value of a property based on its condition and pricing in the local real estate market, and is a key part of the mortgage-approval process. Here's a look at how and why it's done, and what you need to know.
How Does a Home Appraisal Work?
Mortgage lenders require an appraisal before issuing a loan on a home or other real property. Its purpose is to protect the lender from issuing a loan for more than the property is worth. If you fail to repay the loan, the lender will seize and resell the property, and verifying the property's market value reassures the lender that it will be able to recoup all or most of the loan amount.
When valuing a home, appraisers consider a variety of factors, including the size and overall condition of the home. An appraisal typically involves two steps:
- A visual inspection: An inspection of the property's interior and exterior is used to assess the general condition of the property. It considers attributes such as:
- Square footage
- The age of the home
- The number, type and size of rooms
- The condition of appliances, amenities and landscaping
- Home improvements
- Signs of water damage
- Signs of pest infestation
- A comparison to recently sold properties: Based on the inspection, the appraiser researches local property sales to see how much comparable properties, or "comps," have sold for in recent months. An appraisal report cites the comparable properties used to determine a home's market value.
Sometimes, a property has unique or unusual attributes or is so atypical of its market that no direct comps can be identified. In this case, appraisers sometimes determine market value by calculating the labor and material costs of rebuilding the structure.
Who Chooses the Home Appraiser?
An appraisal is conducted by a licensed third-party professional chosen by the lender. The cost of the service is typically paid by the homebuyer but, like other closing costs, it's possible to negotiate with a motivated seller to pay the fee from their proceeds of the sale. (That option is unlikely in seller's markets—when there are fewer homes available and sellers have an advantage—like those seen in most of the country during the 2020s.)
How Much Does a Home Appraisal Cost?
The cost of a typical single-family home appraisal ranges from $300 to $420, while appraisals on multi-family homes can run as much as $1,500, according to HomeAdvisor.
Appraisers' fees are based on an hourly rate and reflect time spent inspecting the property (typically one to three hours), researching comparable properties and writing an appraisal report. The process can take extra time, and run up higher fees, on properties with multiple buildings or uncommon attributes.
Some appraisers offer what are known as summary appraisals or "drive-by" appraisals, which entail inspecting only the exterior of the home and then researching comparable properties. The COVID-19 pandemic gave these appraisals a boost in popularity, but most lenders require appraisals based on a full walk-through inspection of the property.
How Long Does a Home Appraisal Take?
The inspection portion of a home appraisal typically takes a few hours, and researching comparable properties and writing up a detailed report typically takes another week or two. In busy housing markets, appraisers can get backlogged, and scheduling their visit to the property can add additional time to the process.
When Do You Need a Home Appraisal?
The lender typically requires a home appraisal anytime it issues a loan to finance a home purchase. Lenders may also require appraisals when refinancing home loans. If you're purchasing a home with cash, a home appraisal is not required—but it may still be useful so that you can have an accurate idea of what your home is worth and avoid overpaying.
It's also useful to get an appraisal on a home that you already own, typically to document an increase in value and calculate your home equity. This can help you secure a home equity loan or have private mortgage insurance (PMI) premiums removed from your mortgage payments. In both cases, you'll need your lender to accept the appraisal findings, so it's wise to consult them to be sure you use an appraiser who meets their approval.
What Buyers and Sellers Need to Know
Here are some ways a home appraisal can affect the buyer and the seller in a potential home sale.
A lender typically will not issue a loan for more than a home's appraised value. So if you make a purchase offer and the appraised value comes in below your offer amount, you may have to put up extra cash or back out of the sale, potentially forfeiting an earnest money deposit you may have made.
An appraisal contingency can be added to your purchase contract to give you the option of backing out without penalty if the home's appraised value falls short of your offer. It can protect you and your earnest money deposit. In situations in which multiple bidders are competing to buy a home, bidders sometimes waive this contingency as a way of making their offers more attractive to sellers.
As a seller, it's in your interest to have an appraisal reflect the full value of your home. So if you've made recent improvements on the property, particularly of a kind that might not be obvious from visual inspection—replacing the roof or installing a HVAC system, for instance—it's wise to give the appraiser that information. On the day of the appraisal, you can leave the appraiser a note describing the work, along with copies of receipts or other documentation.
The Bottom Line
An appraisal is a necessity in any real estate transaction that requires a loan. The purpose is to protect the lender, but an understanding of the process and its potential consequences can benefit both buyer and seller as well.