Home Appraisals: How They Work and What to Expect

A home appraisal is part of the home-buying process. Before you can buy or sell a home, you need a real estate appraisal to determine whether the price you’ve agreed upon is in line with the market value.

What is a home appraisal?

An appraisal is an opinion of a home’s value. In general, an appraisal is performed as part of the home-buying process by someone who is specifically certified or licensed to look at the property and determine how its value relates to nearby homes.

As you complete the steps to buying a home, it’s important to recognize that your home appraisal is different from a home inspection.

1. A home inspection is when someone is looking at the home and trying to determine whether it’s structurally sound and recommending repairs.
2. A property appraisal is about the value of the home. While the home’s condition, relative to homes around it, might be considered, an appraiser usually won’t offer insight into needed repairs or comment on the safety of the home.

How a home appraisal works

For the most part, a real estate appraisal is fairly straightforward. After you apply for a mortgage, agree on a home purchase price, and the home is under contract, an appraiser will review the property to determine whether it’s “worth” as much as the agreed-upon price.

Most states require appraisers to have specific training and credentials. In addition to visiting the home and walking through it, an appraiser usually looks at recent real estate transactions to determine what nearby homes with similar features have sold for.

For homebuyers

As a homebuyer, it’s important to understand that the home appraisal is part of the closing process. You might be excited about buying a home and willing to pay the asking price, but an appraisal might change the situation — even if you have mortgage pre-approval.

Before closing on the loan, your lender will want to know that the home is in line with the local market value and that the price makes sense for the home. Here are some scenarios to keep in mind:

1. If an appraisal comes in below the price of the home, you’ll start negotiating. If you can convince the seller to lower the price of the home, great! But if the seller refuses, you might need to increase your down payment to cover the gap. At that point, you need to decide if you still want to buy the home. Many contracts allow you to back out of the sale and recover your earnest money if the appraisal comes in low.
2. If the appraisal comes in above the purchase price, you know you’ve got a good deal and can move forward with confidence.

Learn More: Property Tax Assessment: What It Is and What It Means

For home sellers

As a seller, you might believe you’re asking a fair price for your home, but the home appraisal can tell a different story — especially if your surrounding area has experienced a relatively high number of distressed sales, nearby foreclosures, and short sales.

When homes in the area are selling for less, that’s an indication of trouble in the local real estate market, and it can affect your own home appraisal.

You can choose to hold out for an all-cash buyer, or someone willing to pay extra for the home. But the reality is that:

• The buyer’s lender likely won’t approve the mortgage loan if the appraisal comes in lower than the purchase price and an all-cash buyer might not be willing to pay extra for the home.
• It might be difficult to find an all-cash buyer if your home doesn’t offer a readily apparent investment opportunity.

Tip: If you need to make the sale and complete the home purchase process quickly, you might have to accept the lower price and hope it doesn’t impact your own plans to buy a different house or meet other goals with the money.

Home appraisal cost

Home appraisal costs are the fees charged to appraise your property’s value. These generally cost around $300 to $500 but can cost significantly more, depending on your location and other factors.

In general, the appraisal is one of the closing costs associated with buying a home, and lenders usually expect you to cover that cost as the buyer. However, you can always negotiate with your seller to try to get them to cover the cost.

How to boost your home’s appraisal value

As a seller, you want to increase the chances that your real estate appraisal will come in high enough to justify the selling price — and keep the mortgage closing on track. Here are some tips on how to boost that appraisal value:

1. Start with curb appeal: One of the easiest ways to improve your home’s perceived value is to give a good impression from the start. Trim bushes, repaint the front door, and see if you can make any other cosmetic upgrades.
2. Emphasize the desirability of the neighborhood: Talk about the good points of the neighborhood, including any new schools or nearby amenities that make the area attractive and could boost the overall value of your home.
3. Touch up the inside: Have the carpets professionally cleaned to get rid of stains and smells. Plaster over holes and cracks in the walls. Consider a fresh coat of paint if what you have is peeling or faded.
4. Update fixtures: Try to modernize the look of your home with new light fixtures, faucets, and other items.
5. Make simple repairs: Some repairs, like replacing a broken window or switching out a leaky faucet, can help you keep the value of your home up. In many cases, appraisals are made in $500 increments, so check your home with a critical eye to see what can be done to make a $500 improvement.
6. Point out upgrades: Go through the home with the appraiser and draw attention to upgrades and improvements. This is especially important for less visible changes, like adding insulation, using energy-efficient windows, or replacing the roof.

Home appraisals for refinancing a mortgage

Remember that refinancing your home loan is the same as getting a new mortgage to replace your old mortgage. As a result, you should be aware that you need a home appraisal in some cases.

Some refinancing programs, like an FHA, streamline refinance, don’t require an appraisal. However, you might need to meet other requirements to avoid having an appraiser come in. Generally, though, you can expect to see an appraiser, especially if you plan to take cash out as part of your refinance.

Just remember that lenders are taking a risk when they allow you to borrow such large sums of money. So a property appraisal lets them decide whether the home is valuable enough to take that risk.