10 Things to Know About a Home Appraisal

The main purpose of a home appraisal is to assure the mortgage lender that the home is worth the asking price. Banks and other mortgage lenders are taking a big risk when they loan hundreds of thousands of dollars to a buyer. If the buyer defaults on the loan, the lender's only recourse is to foreclose on the home and try to sell it. If the home isn't worth as much as the loan, the bank will never get its money back.

That's why the buyer typically pays for the home appraisal, which costs between $300 and $400 for a single-family home. The bank or mortgage lender generally has a stable of appraisers who it trusts to come up with an accurate appraisal.

If the appraisal comes back equal to or higher than the asking price, then the sale can move forward, but if it comes back low, that could be a problem. The bank is highly unlikely to approve a mortgage that's above the appraised value, which is bad news for the seller, who may have to lower the asking price.

Appraisers are usually on a tight schedule, especially in a hot housing market. Noble Fields, a certified appraiser trainer in San Francisco, California, says that appraisers will only spend about 20 minutes at the actual home. The rest of their work happens back at the office.

Appraisal reports follow the Fannie Mae Form 1004, which requires that the appraiser physically examine the property to confirm the size of the property, the number of bedrooms and baths, total square footage of the living area, any upgrades to or defects of the house, and more. An experienced appraiser knows exactly what he or she is looking for and moves quickly through the home, checking off each item on the form.

Because appraisers are short on time, it's important for the seller's real estate agent to be present during the appraisal to point out important renovations or upgrades that may increase the appraisal value, or account for damage or needed repairs that could lower the appraisal value.

Legally, brokers and lenders can offer their opinions about the value of a home, but they're not allowed to dictate to the appraiser what they want the value to be.

Have you heard someone complain that their neighbor with the unkempt lawn or the crumbling driveway is "bringing down home values"? They might have a point. Since the value of your home is largely determined by the sales price of similar homes in your neighborhood, there's a lot riding on how your neighbors take care of their properties.

But even more problematic than weedy lawns or chipping paint jobs is a housing market hit hard by foreclosures and short sales (when a homeowner in financial trouble sells their house for less than the amount owed on the mortgage). These types of "distressed sales" can significantly lower property values for comparable homes in the neighborhood, including yours.

The good news is that most appraisers will try to exclude foreclosures and short sales if they can find other accurate comps nearby. But if the neighborhood is drowning in distressed sales, it will inevitably bring down the value of all homes.

The appraiser is going to be at your house in about 20 minutes and you're already running around like a crazy person. So is it really important to get the dirty laundry out of the overstuffed hampers and sweep up all the dog hair and dust bunnies? Yes, yes, yes! True, your home is appraised based on the square footage, number of rooms and amount of land, so technically, your housekeeping skills don't count. But appraisers are human, and they're bound to be influenced by a big mess.

Appraiser trainer Noble Fields says that appraisers appreciate being able to move through the house freely without having to step over and around piles of clothes and other obstacles. Anything you can do to help your home get valued at the top of the range versus the bottom is worth the extra effort.

Interestingly, the whole point of an appraisal isn't to calculate an objective value for the home based solely on its size and amenities, but to compare it to other homes in the area that were recently sold. For an appraiser to determine a home's fair market value, he or she needs an up-to-the-minute understanding of the local real estate market.

The appraisal report includes space for three "comparable sales," known in real estate parlance as "comps." The appraiser will use real estate databases like the MLS (Multiple Listing Services) and other public records to search for recently sold homes that are the closest match to the property in terms of its geographic location, its size, age, condition, view and so on. Generally, these will be houses in the same neighborhood as the one being offered for sale.

For a comp to be accurate and useful, it must be recent. Again, if a real estate agent wants to ensure that the seller gets the best appraiser, he or she will provide the appraiser with a list of up-to-date comps that come in at or above the asking price.

You know that hole in the wall, where the thing went through the thing and broke the thing? The cracked window pane that you temporarily fixed with duct tape? The back door that the dog scratched up and the crack in the basement door from repeated slamming by your surly teenager? All of the things you've been meaning to get to and have put off again and again? Well, now's the time to get off your duff and get them all fixed.

Not only will damage affect your appraisal in a negative way, but if your loan is insured by the Federal Housing Administration (FHA), appraisers are required to report damage to them.

There are certain situations in which a home seller might want to order their own appraisal. For example, it's not always clear at what price a home should be listed. You might meet with several real estate agents, each with very different suggestions for the initial asking price. If you set it too low, you'll make less on the sale than you could have, but if you set it too high, you'll scare off potential buyers.

In that situation, it's perfectly reasonable to pay the $300 to $400 for an independent appraisal to find the most accurate market value of the home and set the price accordingly. Just know that the lender is still going to want their own appraisal, so your appraiser's assessment isn't the final word.

Since the buyer pays for the appraisal, he or she has the right to get a free copy of the full report. Lenders are required to send appraisals to buyers promptly but at a minimum no later than three days before the loan closes. If the appraisal comes in at a lower price than the one the buyer and seller agreed upon, the buyer will have good ammunition to negotiate a lower price.

The only time a seller will see a copy of the appraisal report is if the buyer wants to use it to negotiate this lower sales price. If the appraisal comes back at or above the asking price, the seller has no reason to worry about it. In a hot real estate market, the buyer may have to pay cash for the difference between the appraised value and the amount the seller is asking.

Some real estate agents believe that it's illegal to communicate in any way with an appraiser, but according to The Appraisal Foundation, that's not the case at all. Appraisers welcome any and all information that helps them determine the most accurate market value of the home. That includes additional comps provided by the seller's agent, invoices or receipts for major upgrades and renovations and proof of continual maintenance and upkeep.

What is strictly forbidden, however, is any type of communication specifically intended to coerce or threaten the appraiser into giving a higher home value than the property deserves. For example, a real estate agent can't insist that the appraiser match the seller's asking price or threaten to ban the appraiser if he or she doesn't play ball. That's unethical and could forfeit the real estate agent's license.

If you're the seller and you feel that the appraisal came in lower than it should have, you can protest it. Contact the lender and find out what their procedure is for appraisal disputes. But you're going to need to be armed with documentation to support your argument.

Be sure to include photos and a record of all improvements, as well as comps of other houses that should have been included. Your real estate agent should be able to look at the ones that were used for the appraisal and help you come up with better comps.

However, know that only the mortgage lender can require a second appraisal. If the lender rejects your request for reconsideration (or it doesn't change the property value), you can pay for an appraisal on your own and see if you get different results.