Determining the value of a property can be difficult because each piece of real estate is unique.
Even in a planned development with cookie-cutter homes, each structure is uniquely positioned on the earth and might not be in the same condition or offer the same views as the identical property next door. Plus, values are always changing due to a number of economic factors. So the value of a property today could be very different from the value a few months ago.
This is why we need appraisals. Appraisals help us calculate the fair market value of a specific property at a specific point in time.
In this article, we’re answering all your appraisal FAQs, including:
- What is an appraisal?
- How do appraisals work?
- How long does an appraisal take?
- How much does an appraisal cost? And
- Who pays for an appraisal?
Whether you’re buying a home, selling a home, refinancing your mortgage, or building a real estate portfolio, here’s what you need to know about appraisals.
What Is an Appraisal?
An appraisal is a formal determination of a property’s value at a specific point in time, as assessed by a licensed appraiser.
Appraisals are typically sought in three situations:
- When a property is being sold. The buyer will likely want to confirm the value of a property before committing to the purchase. If the purchase is being financed with a home loan, the mortgage lender will likely require an appraisal since the property will serve as collateral for the loan.
- When a property owner is looking to refinance the mortgage or borrow against the equity through a home equity loan or home equity line of credit (HELOC). In each case, the lender will need the appraisal to confirm the value of the property since it is used to secure the loan.
- As part of a business or estate valuation. Many organizations and estates conduct periodic valuations of all holdings to establish the current value of the entity for stakeholders.
Understanding the Appraisal Process
The most complex part of the appraisal process is the methodology applied by the appraiser. In your role as the buyer, seller, owner, or investor, the process is actually very straightforward.
How Do Appraisals Work?
When a licensed appraiser receives an order for an appraisal, they will begin researching the property online, collecting data points from reputable sources like county property tax records, permit office records, and previous listings for the home (if it has sold before). The appraiser may also ask the property owner for additional information. In the case of multi-family rentals, for example, the appraiser would like to see the rent rolls and income and expense statements to determine the value of the property according to its income. After this initial research phase, the appraiser will schedule a property visit.
At the property visit, the appraiser will walk through the grounds and the structure(s) to evaluate their general condition and note anything that could affect the value of the property.
The appraiser will then conduct additional research on outside factors that impact the property’s value. For example, the value of a single-family home depends on the sales price of recently-sold homes that are similar to the subject property. So the appraiser would review recent sales of comparable homes in the neighborhood, then make adjustments for any material differences between the comparable properties and the subject property.
The appraiser will document their methodology and provide a written appraisal report to show their concluded value and how they arrived at that value.
What Do Appraisers Look For?
In short, appraisers are looking for anything that adds or detracts from the value of the property. This includes factors like:
- Condition of the property,
- Number of bedrooms and bathrooms,
- Curb appeal,
- Age of the property,
- Layout and design,
- Size of the home,
- Size of the lot,
- Safety features,
- Any obvious signs of material damage,
- Any home improvements, and
- Any eco-friendly features.
How Long Does an Appraisal Take?
For an average-sized home, the appraiser will likely need only an hour or two on-site. Larger homes may require a few hours. The appraiser will also spend several hours researching the subject property and comparable sales from their office.
How Long Does It Take to Get an Appraisal Back?
On average, it takes 7-10 days for an appraiser to complete the entire home appraisal process and deliver the appraisal report.
It could take more or less time depending on the appraiser’s schedule and current workload.
How Long After Appraisal to Close?
The amount of time it takes to close after an appraisal depends on factors that might not have anything to do with the appraisal.
In a smooth transaction, the deal might close just a week or two after the appraisal. If there is a lender involved, this gives them enough time to finalize the underwriting and have the borrower sign the loan docs.
However, there could be other issues, like a cloud on title, which prevents the loan from closing quickly after the appraisal. A cloud on title means that a third party has an ownership claim, and the current owner does not have the all-clear to sell the property. A cloud on title could come from having an ex-spouse listed on the property’s title (in which case they would need to approve the sale or release their ownership claim) or a past-due property tax bill (in which the bill would need to be paid to eliminate the tax collector’s claim against the property).
What Hurts a Home Appraisal?
Anything that detracts from the home’s value could potentially hurt the home appraisal. Possible detractions include:
- Undesirable location,
- Small plot size,
- Too little square footage (or number of beds/baths),
- Aged structures (particularly those that have not been recently renovated),
- Unattractive curb appeal,
- Older home appliances and systems (like HVAC and plumbing),
- Condition of home and systems,
- Lack of parking, and
- Lack of amenities or views that local buyers in your price range would expect.
How Do I Find the Last Appraisal of a Home?
In some cases, you may be able to get a copy of the last appraisal of a home from the party that ordered it. For example, if the executor of an estate had an appraisal completed recently for a property you wish to buy, the executor might be willing to share that report.
However, the party that ordered the report has no responsibility to share that report or its conclusion with anyone. Furthermore, appraisals can become outdated quickly in fast-paced markets.
How Long Is an Appraisal Good For?
There is no hard-and-fast rule for how long an appraisal is good for. Rather, it depends on how much movement is happening in the market.
In a fast-moving market, where home prices are fluctuating rapidly, an appraisal may only be good for 30-90 days. In a stagnating market, where home values don’t move for long periods of time, an appraisal could potentially be good for a year or more.
If the appraisal is done for a specific financing purpose, like a purchase or refinance, the lender may dictate how recent an appraisal needs to be in order to be considered “current.”
The Cost of an Appraisal
The cost of an appraisal is highly localized, with some markets paying far more than others for an appraisal. Having said that, we can offer a few general estimates.
How Much Does an Appraisal Cost?
A standard home in the average market will have an appraisal cost of around $300-$400. However, in high-value metro areas (like Los Angeles, San Francisco, or Miami), appraisal fees may be closer to $600.
The size of the property is a factor in the price of the appraisal. If you have an exceptionally large property, you could potentially be looking at closer to $1,000. Underestimating additional costs like this is one of the mistakes to avoid when investing in real estate, so take a few moments to contact local appraisers for quotes so you can budget accurately.
Who Pays for an Appraisal?
The party that pays for the appraisal depends on who will benefit from the appraisal.
In a property purchase, the buyers typically pay for the appraisal. This is because it is in the buyer’s best interest (and their lender’s best interest) to confirm the value before purchasing the property. In some slow markets, the seller may offer to cover this cost in an effort to incentivize buyers to choose their property.
In the case of a refinance or a business/estate valuation, the property owner will pay for the appraisal.
Appraisal Outcomes and Next Steps
In most cases, an interested party is looking for the appraisal to hit a specific value. Homeowners looking to refinance, for example, may be looking for the appraisal to hit a certain value so they can borrow the amount they want from their equity.
The most common reason for an appraisal is that homebuyers and home sellers are looking to hit the price on the purchase offer, confirming that the value offered and accepted is the fair market value. In this case, there are three possible outcomes:
- The property appraises for the offer price, and everyone is happy.
- The property appraises for more than the offer price, and the buyer is happy because they have spotted a good real estate investment. Since the buyer paid for the appraisal, they have the right to keep the report to themselves and not share it with the seller.
- The property appraises for less than the offer price. This can create an issue for all parties: buyer, seller, and lender.
What Happens If an Appraisal Is Lower than the Offer?
If the home appraises for less than the accepted offer price, the buyer’s options depend on their financing.
If the buyer is purchasing the home in cash, they have the option to proceed as planned (knowing that they are paying more for the property than it might be worth), request a reduction from the seller, or employ their appraisal contingency to back out of the deal. If the appraisal contingency was waived, the buyers may forfeit their earnest money deposit by backing out at this stage.
If the buyer is financing the purchase with a home loan, and the appraisal is lower than the offer, the lender will insist that the buyer address the appraisal gap…
What Is an Appraisal Gap?
An appraisal gap is the difference between the appraised value and the offer value. When paying cash, this is not an issue; the buyer can voluntarily pay more for the property than the appraiser says the property is worth. But lenders will not finance more of the assessed value than the loan type allows.
This is best explained with an example.
Let’s say a homebuyer found a fixer-upper in Los Angeles for $500,000. Using a conventional loan, the buyer needs to make a down payment of at least 3%, so they plan to put down $15,000 and get a loan of $485,000 for the other 97%. Now, what if the appraisal comes in at $450,000? The bank is still willing to lend 97%, but that only comes to $436,500.
In this case, the buyer has four options:
- Ask the seller to bring the sales price down to the appraised value of $450,000.
- Request another appraisal, hoping that the second appraiser finds that the property is worth $500,000.
- Pay the difference out of pocket. In our example, the buyer would need to add $48,500 to their down payment to cover the appraisal gap.
- The buyer can back out of the deal.
Depending on market conditions, the sellers may be more or less inclined to work with the buyer to cover the appraisal gap.
Determining the value of a property may be challenging, but it is critical to establishing the fair market value of a property. Whether you’re buying a home, refinancing, completing a business/estate valuation, or investing, understanding how appraisals work is critical to making your next deal a success.
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