Step 14 to Buying a Home: The Appraisal
As you saw in the previous section, the appraisal contingency is key.
- So, what is an appraisal anyway and when does it occur?
- Does the buyer or the seller pay for the appraisal?
- Who hires the appraiser?
- Who performs the appraisal?
- Who pays for the appraiser?
- How much does an appraisal cost?
- What happens if the appraisal comes in lower than the purchase price of the home?
These are all great questions!
What Is a Home Appraisal?
A property appraisal is an estimate of a property’s value. Property value is based on such factors as location, amenities, structural condition and recent sales of similar local properties.
A home appraiser conducts the process. The appraiser will do a walk-through of the property, noting anything that can alter the home’s value. For example, if the house has a swimming pool but swimming pools aren’t popular in the area, it might not add much value to the property—the pool might even detract from it.
The appraiser will sketch and take photos of the property layout and will look for any safety code violations. If there are any, you may need to fix them before the lender approves the loan.
Who Performs Home Appraisals?
Appraisers are third-party certified or licensed contractors, and the lender usually hires them. They are knowledgeable in real estate and are required to know how to evaluate a property on factors such as neighborhood growth, neighborhood housing trends and market conditions.
To be safe, make sure the appraiser is certified and deals with multiple lenders. If the appraiser only works with one other lender, he may have outside interests—and you may not receive a correct assessment.
Who Pays for Home Appraisals?
The cost of home appraisals depends on the property value, location, and size of your property. They cost a few hundred dollars and typically the buyer pays the fee at closing, although you can opt to pay it up-front. Your lender will supply tell you what the fee for the appraisal will be.
How Long Do Home Appraisals Take?
For most loans, a typical property assessment takes a few hours or less. Turnaround time should be within seven business days, although a busy market can mean a longer wait.
The appraiser will give the final documents—called the appraisal report—to the lender, who is required to show it to the buyer. Make sure you obtain a copy for your own records.
What if the Appraisal comes in lower than the Purchase Price?
So, what do you do if you’re the buyer paying $500,000 for a home, but the appraisal only comes in at $450,000? This figure means that the amount you can finance on the property is much lower than you expected. An appraisal value that is considerably lower than what you have offered should be a red flag - a warning that you may be paying too much for the property. So, is the deal over? Is it time to panic and throw in the towel? Can anything be done?
First, look at what may have caused the low appraisal. It might be due to factors that the homeowner could correct, such as repairs or maintenance. If that's the case, the appraiser may be willing to take a second look and adjust the appraisal accordingly.
But what happens if you’re the buyer paying $500,000 for a home and the appraisal value comes in right at the purchase amount price? Is this a good or bad thing? This is a good thing as it means the bank will give you a loan for the full amount of the purchase price.
But what happens when an appraisal comes in high (where the appraisal amount is over the purchase price) and does this happen very often? No, it’s very rare for an appraisal to come in over the purchase price as the bank just needs to know that the property is worth the purchase price so they feel comfortable giving you a loan. Therefore, it’s not common for an appraisal to come in over purchase price. When it does, buyers are often very happy as, essentially, you know have instant equity as we got you a great deal! Occasionally though if your home comes in significantly over the purchase price (say $50K or $100K over the purchase price) it can cause problems. In this scenario where a home comes in significantly over the purchase price, sometimes the underwriter will wonder if there was something shady going on which allowed you to get such a great deal. So, as the buyer, all in all its best when the purchase price comes in at or close to the purchase price.
Who orders the appraisal?
Your mortgage lender is the person who orders the appraisal, but will call you to get your credit card at some point in the near future to pay for the appraisal. Generally the cost is somewhere between $350 – $500 and is considered part of your closing costs, even though you pay for it up front.
A few tips about the appraisal:
- You do not need to attend.
- The buyer’s Realtor does not attend either. Typically, only the seller’s Realtor attends in order to give access to the property.
- It generally takes about a week before the appraiser comes out to conduct the appraisal. After that it usually takes another week or so for the report to be written. Expect it take about 2 weeks to receive the report. This is typically about how long your contingency will be, so as you can see it is vital to get the appraisal ordered promptly.
- Once the report is written, it’s given to your mortgage lender. Your mortgage lender will then forward it to you and let you know whether the property appraised at the purchase price, below the purchase price, or above the purchase price.
- If the property appraised at the purchase price, nothing further needs to be done and the closing process will proceed forward as planned.
- If the property appraised for more than the purchase price, congratulations! That means we got you a great deal and you’ll have instant equity in your home on the day you move in!
- If the property appraised for less than the purchase price, we have a problem. That means the bank will only give you a loan for the appraised value. In this case, we then go back and renegotiate the purchase price down with the sellers, ideally to the appraisal price. If they won’t come down to the appraisal price, then you can choose to either walk away and get your earnest money back or bring the additional funds to closing.
- While you have the privilege of paying for the appraisal and will receive a copy of it from your lender, you do not get any say in who does the report itself.
Go back to Step 13 to Buying a Home: The Importance of Contingencies, go forward to Step 15 to Buying a Home: Review the Condo Documents.