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How Does A Home Appraisal Work?

Certified Mortgage Advisor
NMLS 1701021
February 26, 2020

How appraisal works

Now, let's talk about how an appraisal works. So either you're buying a home or you're selling a home and an appraisal needs to be done if there's financing on the property. That means if the buyer is using a loan to purchase the house, then you need an appraisal because the appraisals are going to tell you the value of the home and if the buyer can get financing up to that value.

Let's not fear appraisal, know what it all about first

Now appraisals can be scary sometimes because we hear stories of problems that happen with appraisals or values that come in short. So we're going to walk through the process of that along with some solutions. And I have one trick that a lot of people don't know if you have an issue with an appraisal on actually how to get a redo appraisal.

Wrong notion about appraisal

So let's first dive in really quickly. An appraisal is not a home inspection. If you're a buyer, you absolutely should get a home inspection.

What is inspection?

The inspection is going to look for problems and structural issues that you need to address when purchasing the home. It is not going to tell you the value of the property.

What is Appraisal?

An appraisal is an appraiser's opinion of the value of the home. So the appraiser basically goes out to the property, and they are going to figure out what they think the home is worth. And it's all based on their opinion and their expertise. And they're going to have an entire appraisal report that supports that.

Works on behalf of the lender

The appraisal also works on behalf of the lender. They're independently employed, meaning they don't work for the lender. But they're working on behalf of the lender. So it ends up happening is the lender is the person who hires the appraisal.

Lender needs to know if they can sell the property in the future

What the lender wants to know is how much is the home worth based on a third party, opinion of the value. They don't want somebody interested in the deal to give value to the home. And the reason why a lender needs to know the value is that the lender is the one using the home as collateral for the loan.

So in the event that the buyer doesn't make their payments and they need to foreclose, the lender wants to know, can they sell the property for the loan value or higher?

So a lender is not going to lend more money than the appraised value. And normally the lender wants to see a down payment on either the lesser of the appraisal value or the purchase price.

Who pays the appraisal?

The buyer is going to be the one who pays for the appraisal. Now you might run into a buyer who's using cash, or they're using financing. If they're using cash, they can choose to have an appraisal or not. They don't have to have an appraisal on a cash offer. They might have it just to get a better idea and understanding of your home's value. A buyer with financing is required to have an appraisal, and this is going to be paid for.

And it's normally around $500 for a normal single-family home. The reason it's paid for upfront by the buyer is that the appraiser wants to get paid, whether the deal closes or not. It's not refundable if the deal does not close. So the appraiser gets paid upfront. So how does the appraiser know how to get the value of the home?

Sales Comparison

The main method they use is what's called the sales comparison approach. In the sales comparison, the approach and appraiser are going to look at the home that they are appraising along with four to five other different comparable properties. They're wanting to see, okay, this home is currently listed at X amount of dollars.

We want to see all the other homes that are listed. How much are they selling for and are they comparable to this house?


So an appraiser is going to look anywhere between four to five comparable homes. This is called "Comps". A lot of people would kind of use that as the short version. They're going to look for comps.

And basically what this means is if you have a three-bedroom, two-bath home of 2000 square feet, they want to look for other homes that are the same three bed, two bath, 2000 square feet. They want to get as close to your home as possible because they're kind of looking at the whole scope of what is the market saying that this home is worth not just what is a buyer willing to offer. But what does the market as a whole see that the home is worth? So they're going to use four to five comps.

Comparing within the 1 mile radius

Ideally, they want to be within a one-mile radius. So if there's a home here in the center, Then they want to see a one-mile distance around that home for those comparable. They don't want to go outside of that because then the market data starts getting a little skewed.

Why within 6 months?

Also, they want homes that have sold within the past six months. Preferably this is going to give the most up-to-date market data. There's no point in getting home value. If it's, you know, let's say five miles away and it's sold over a year ago. That's not going to be a strong indication of if the market is supporting how much the home is worth.

So the appraiser's gonna look at these comps. They're going to find comps that are within the mile within the past six months, and are most similar to your house. The problem is they're not homes exactly like yours. There might be a slight difference in square footage. Maybe there's. One extra bath or one extra bedroom, or maybe there is a finished basement versus a non-finished basement.


What's going to happen is an appraiser's going to put in what's called "Adjusted". Adjustments are different values that either go up or down, depending on different features and homes. So if your home doesn't have a basement but the other home that's being compared does then an appraiser's going to give an extra monetary value to that home. And it's going to have to subtract that value from your current home. So something to keep in mind, is they're going to use these adjustments to kind of level the playing field as much as they can.

Replacement Cost Estimate

Another approach that they use is to look at the values of what's called the Replacement Cost Estimate. This is basically how much will it cost to completely rebuild your home. This often isn't used for residential real estate appraisals. This is mainly used if there are. Comparables, maybe you're in a really rural area or more for commercial buildings. They might use this approach, but most of the time with a regular residential property, you're going to be looking at the sales comparison approach.

Appraisers look at: Exterior

So what does the appraiser look at. Number one, they're going to look at the exterior. They're going to make sure that the roof has a is, is solid. It's intact. There aren't problems with the roof. They also want to look at the foundation. They want to look at the exterior siding or brick or whatever is going on outside.

Appraisers look at: Health and safety issue

Also big appraisers, big thing there they're pointed on his health and safety issues. So they want to make sure that the new buyer isn't going to have any problems with health or safety when they move in. So anything even a tripping hazard is a big deal on an appraisal that needs to be taken care of before the homeless.

Appraisers look at: Size

They're also going to verify the size. So if market data says that your home is 3,500 square feet, they are going to make sure that it's 3,500 square feet and correct that data, if it needs to be corrected.

Appraisers look at: Interior

They're also going to look at the interior. So what kind of flooring is being used, where are the conditions of the walls, what's plumbing and electricity look like what do kitchens and baths look like? They want to see the interior of the home be in good operating.

Appraisers look at: Improvements

Also, they're also going to look for improvements. So things like how up-to-date is the kitchen? How up-to-date is the bathroom, where there any add-ons or additions or things added to the exterior of the house that is different than normal?

So those improvements are really helpful to the appraiser to see if the value has gone up.

Appraisers look at: Amenities

Lastly, amenities. So do you have a pool? Do you have a built-in grill? Are there things inside or outside the home that is different than you would normally see in a home that could be given value.

Pay for appraisal

So now let's work on a timeline of how this all works. So first the buyer is going to pay for the appraisal. They're going to pay for that upfront again, it's probably going to run around $500.


Then what's going to end up happening is the appraiser is going to call the listing agent. All right. So if you're the seller, that's your agent, or if it's a for sale by owner, they'll just call you.

But they're going to schedule with the listing agent or with a seller on a, for sale by owner. So these they're going to schedule time to come out to the property and perform their appraisal.

Inspection of the home

Then what ends up happening is the inspection. Go ahead. It goes and takes place. So the appraiser goes out there. They might be there for an hour or two. Depends how long they need to do a proper appraisal of your property. But they're going to check for all of these things. The exterior health and safety size interior improvements, amenities, everything that they need for their report.

Your presence during appraisal

You can be there at the appraisal if you want to, or you can leave really doesn't matter. You being there, isn't going to impact the value of the appraisal at all. It just won't happen. You want to make sure you're not distracting the appraiser from doing their job.

Make the home clean to the appraiser

But something to keep in mind is you want, might want to make sure everything is clean beforehand, because if the appraiser can't access certain areas of the home, even if something is blocking access to the attic, the appraiser's not going to wait for things to be moved around. They're simply just going to leave and then charge another inspection fee to come back out to the property.

Value is given to the lender and buyer

So after the inspection explains to the appraisers going to work on their detailed report, this normally takes a few days for them to finalize. And then what ends up happening is that value is given to the lender and the buyer.

The seller is really most of the time, never going to get a copy of that appraisal report and good lenders and buyers. Aren't going to share that appraisal report or the value. For instance, what I do when I get an appraisal that comes in at value is I just say, Hey, the appraisal came back. We don't want to give any other information that could be used to negotiate anything differently.

So if you're the seller, you're probably never going to see the appraisal. You're not going to see the value of it. Maybe until after the deal closes, then the buyer might let you see what that information is. And if you're the buyer, you don't want to share the value of the home. Because if you're buying it for 200,000 and the appraisal comes in at two 10, you don't want the seller to try to figure out how they can back out of the deal so they can get an extra 10 grand or, you know, try to renegotiate an extra 10 grand there.

What to do if the value is lower than the purchase price?

The value is going to come in and it's either going to be higher or lower or at the same price as your purchase price. So if it's at the purchase price, that's great. That's exactly what you wanted. If it comes in higher than that's great as well, that means the deal can still go through. The only issue is if it comes in lower than the purchase, If the appraisal value comes in lower than the purchase price, then that's where we have a bit of an issue.

Challenging the appraisal and how it works

The first thing that we can do is we can challenge the appraisal so we can come back to the realtors and say, Hey, we need some extra comps to support the value of this property. And what we're trying to do is convince the appraiser to bring the value back up to the purchase price. Most of the time, this doesn't end up.

And what you might have to do is renegotiate. So that purchase price needs to come down to match the appraisal value or the buyer needs to spring, extra money to the closing table to make up the difference. Now, one little trick that a lot of people don't realize that they can do is if you're working with a mortgage broker and you're using a conventional loan, you can actually flip lenders to have another appraisal.

Can we redo our appraisal?

So let's say that you have a purchase price of $200,000, and let's say your appraisal came in at 180, and you really think that another appraisal will bring the value back up. You basically want to redo your appraisal. Well, if you're working with just a direct lender, You're going to be stuck with that value.

They can't get a new appraisal done. It just is not legal to go get another appraiser. And the same thing. If you're using a government loan, you can't just get a new appraisal done.

How have a new appraisal

But if you're using a conventional loan and working with the mortgage broker, maybe you're using one wholesale lender. If that value comes in short with that wholesale lender, you can actually go cancel that loan and then start it with another wholesale lender with that same broker, and get a new appraisal done.

Then a new appraiser is going to come out and then they're going to try to find the value of the home. There's no guarantee it's going to come in what you need it to come in at. And it might even come in lower, but it is an option you have if you want to redo it.

The only downside is it can solve the loan process down a little bit and you do have to pay for another appraisal, but sometimes it might be worth considering.

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Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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