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What a Home Appraisal Is Based On: House Appraisal Tips

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What a Home Appraisal Is Based On: House Appraisal Tips
6 min. read
Woman doing a home appraisal

Image: Andrey_Popov / Shutterstock.com

Home appraisals are a vital part of most real estate transactions — and it doesn’t matter if you’re planning on selling your home or purchasing one first. Either way, you’re going to encounter a home appraisal contingency at some point. And, given the importance of the home appraisal process, you should know what to expect ahead of time.

So, in this article, we’ll discuss the importance of the home appraisal, as well as tips to ensure that your home comes out on top during the whole process. Note that a home appraisal and home inspection are not the same things. With that in mind, let’s take an in-depth look at what you need to know about real estate appraisals.

Understanding a Home Appraisal

A home appraisal is carried out by a professional appraiser who thoroughly inspects the property to determine its actual value. Notably, the appraised value isn’t always the same as the actual listing price. For their part, the appraiser will create a report of everything they find — both good and bad — to help determine a home’s appraised value.

If a buyer borrows money to help cover the costs of buying the home, the lender they choose will order the appraisal on the property. The appraisal ensures that the lender is not lending more money than the actual property is worth. Typically, homebuyers include language in a real estate contract that a home must appraise for at least the purchase price. However, in hot real estate markets, some buyers may choose not to put appraisal contingency language in the contract in hopes of making their offer more attractive to the seller. Removing real estate contingencies is not uncommon when there’s an abundance of bidding wars taking place.

What An Appraiser Considers

Here are some of the most vital aspects that a real estate appraiser will consider:

  • Location
  • Interior and exterior condition
  • Exterior additions, such as outbuildings, swimming pools, additional landscaping, etc.
  • Square footage
  • Number of bedrooms and bathrooms
  • Additional amenities, such as central air conditioning, fireplaces, architectural details, or a high-end kitchen
  • Any observable problems, such as water penetration or blatant housing defects
  • Any functional obsolescence

The Importance of Home Appraisals

Typically, lenders will loan the lesser of the appraised value or the purchase price. For example, if you’re putting down 10%, you’ll need to come up with $50,000 if the home appraises for $500,000. Alternatively, if the appraisal comes in at $480,000, the lender will only provide a loan based on the $480,000 appraisal. In this scenario, the lender will only be willing to loan $432,000, which is 90% of the appraised value. Then, for the transaction to proceed, the seller would either need to reduce the purchase price or the buyer would need to come up with an additional $18,000 to put down. Essentially, because the value has come in lower than the purchase price, the difference needs to be made up somewhere.

Lenders also need to maintain the loan-to-value ratio. So, they use their appraised value as the actual value of your home, which determines the loan amount you’re able to receive. Then, if they determine that the property you’re interested in is lower than your offered price, they’ll decrease your loan amount to reflect the difference.

In hot real estate markets, it’s not uncommon for homes not to appraise at their agreed-upon purchase price. In this case, you can ask the seller to lower the cost to reflect the new appraisal value, but many sellers will likely balk at this. Of course, while it will be a long shot, if you don’t ask, you won’t get it. And, in a seller’s market, the next buyer is usually just around the corner waiting to pounce.

So, suppose that you’ve asked the seller to consider a lower price and they declined, but you also don’t want to pay the difference out of your pocket. In this scenario, an appraisal contingency allows you to cancel the purchase agreement altogether — without losing your earnest money deposit.

Why Sellers Should Understand Home Appraisals

Real estate appraisers judge a home on many factors to determine the appropriate property value. Therefore, knowing exactly what they’re looking for will allow you to fix and update any issues with your property so you can get the best value possible. Clearly, the condition of your home matters significantly. So, make sure you take care of any blatant problems that the appraiser will flag, and do what you can to ensure that the interior and exterior look their best. Likewise, remember that buyers will also be researching your property and, essentially, putting it under a magnifying glass. Doing everything you can to see positive results will be well worth it.

Research Your Competition

For comparison, review similarly priced homes in the area, as another home might have certain features that could help increase your property value to a more acceptable amount. For example, even small upgrades, like painting or replacing an old floor, can make a significant difference.

Don’t Forget the Small Things

Every home has minor aspects that may be holding it back from a good value — whether it’s the walls that need a lick of paint or the hinges on the door that need some oil to stop them from squeaking. And, while things like these may seem small and not worthy of your time, a professional appraiser who has an eye for these sorts of things can attest that they do affect the overall value of your home.

Don’t Overlook the Exterior

When trying to impress someone who comes into their property, many people look toward the walls and furniture they have inside their home. But, the state of the outside of the home is also important. Here again, just like the more minor details in your home, apply the same sort of logic to the exterior of your home: if you have overgrown or unkept landscaping, take the time to address it. And, if there’s peeling trim, do some touch-up painting to make it more presentable. While you’re at it, ensure your pathways are clear and that everything is well-lit.

Consider the Look of Your Home

Aside from the small things, you can also make more considerable changes to your home to improve the appraisal value. For instance, consider adding a new coat of paint to the walls, replacing bathroom tiles or changing light fixtures. Ultimately, anything that may look dated or out of place can be adjusted to help make a better impression. But, don’t go over budget when making improvements. At some point, the money you spend can outweigh the potential increase to the appraisal amount.

Clean the Entire Property

It may go without saying, but you’d be surprised at the number of people who neglect to clean their homes before the appraiser arrives. It’s all about making sure that you’re giving off the best impression — and making sure your home is spotless will contribute to this. You don’t want an appraiser to think your home is dirty or not well-maintained. Appraisers are human like the rest of us. They can adjust the appraisal downward based on the condition.

A home appraisal is a significant step in most real estate transactions. As such, both buyers and sellers should have a general understanding of how the process works. And, by now, you’ve likely gained some new perspective on what you need to know about real estate appraisals.

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