When it comes to selling your home, a home appraisal is nearly always required. The process can be both exciting and overwhelming. This is why you should be familiar with the home appraisal process and know what to expect when the appraiser shows up.
Professional appraisers provide an unbiased evaluation of a home’s fair market value. This can help you make informed decisions when negotiating, pricing, and selling your property. This article explores the importance of appraisals. We also look at appraisal pros and cons and why getting an appraisal is essential to the home buying process.
- Understanding the home appraisal process
- Appraisal vs. home inspection
- Should I Get an Appraisal Before Selling My House?
- Benefits of appraisals
- Cons to getting an early appraisal
- Other reasons to get an appraisal
- How much does a home appraisal cost?
- How to prepare for a home appraisal
- Understanding an appraisal report
- Final thoughts
Understanding the home appraisal process
The home appraisal process typically begins with the mortgage lender scheduling a day and time that works with the seller and the licensed appraiser to visit the property.
The on-site inspection by the appraiser typically takes 1 to 3 hours. Sellers should clear their schedule for the day of the appraisal. However, completing the entire appraisal report may take several weeks for homes in busy real estate markets.
A property appraisal considers the home’s condition. They’ll also look at the number of bedrooms and any upgrades or additions the homeowner has made since purchasing the home. Features like swimming pools, finished basements, and energy-efficient appliance upgrades can significantly increase the home’s value.
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After the home appraiser inspects the property, they gather information about:
- Comparable sales,
- average sale prices,
- and other external market factors that may impact the home’s value.
Recently sold properties are a strong indicator of the price range that your house will sell. This will help your real estate agent to price the property accordingly.
The real estate appraiser prepares a detailed report using all the information gathered during the home appraisal process. This report will include the estimated appraised value and any concerns or issues impacting the real estate transaction and the home’s value.
This detailed report is provided to the seller, buyer, and lender and is typically used in negotiations and determining the home’s fair market value.
Appraisal vs. home inspection
The key difference between an appraisal and a home inspection is that appraisals tend to focus on the home’s fair market value, while home inspections are concerned with the home’s condition and safety.
Additionally, the appraisal of the property is required by the lender to ensure that the loan amount covers the home’s cost and that the home’s value is high enough for the borrower to secure the loan.
Another important distinction between appraisals and home inspections is that home inspections are optional and may not be necessary for some real estate transactions. However, home inspections may be required as part of the mortgage lender’s application process depending on your lender and mortgage product.
Home appraisals also consider recent sales of comparable homes in the area, while the home inspection only concerns the property’s condition.
While home appraisals and home inspections have some key differences, the two also have some similarities. First, both consider the home’s exterior and interior condition in the final report. Appraisals and home inspections are also meant to protect the buyer’s interest to ensure they receive the proper mortgage amount and don’t significantly overpay for the home.
Should I Get an Appraisal Before Selling My House?
The lender will always require an appraisal before the home purchase is finalized. However, there are some instances where it makes sense for the seller to pay for a pre-listing appraisal before the purchase agreement is signed.
When it makes sense to get a pre-listing appraisal
Below are some situations where you should consider getting an appraisal before selling your house:
- Your home is unique compared to other properties in your area. Unique homes are often difficult to appraise since they are unlike most other properties in the area. In this case, paying for a pre-listing appraisal may be a good idea to understand how much your home is worth before listing it on the market.
- There is little data on comparable properties. Comparable properties (or “comps”) accurately indicate the price range that you can expect your property to sell. However, sometimes there aren’t enough houses selling in rural areas and parts of the country with lackluster housing markets to get an idea of comps in the area.
- Your home is larger than most in the area or you’re selling a lot of land. Homes that are larger and have desirable features like swimming pools and other amenities may need a pre-listing appraisal to assess the added value of these additions. Homeowners with several acres of land may also opt for an appraisal of property before listing with a real estate agent.
Benefits of appraisals
The mortgage lender requires appraisals to protect the buyer from overpaying for a home and receiving a high mortgage balance that puts them underwater. However, some benefits go beyond only protecting the buyer’s interests.
The loan-to-value (LTV) ratio is exactly as it sounds. It’s the ratio of your mortgage balance, or loan, compared to the home’s value. A primary benefit to appraisals is determining your LTV, which can allow you to secure favorable terms when buying or selling.
Additionally, a lower LTV means you have more equity in your home that you can use for cash-out refinances and other instances of borrowing.
Borrowers with a loan issued by the Federal Housing Administration (FHA) may also qualify for the cancellation of mortgage insurance once their LTV reaches 78 percent, and will need an appraisal to do so.
Better terms for the buyer
The reality is that appraisals often benefit the buyer more than the seller, which means it’s important to understand how the buyer may use the appraisal to their advantage.
Appraisals often allow buyers to negotiate a lower price for the home. When an appraisal comes back lower than the list price, buyers may use that as a bargaining chip when negotiating the purchase price for the home.
While this isn’t encouraging for sellers, knowing that the buyer will use this to their advantage can help your real estate agent price your home accurately and put you in the best position to get the most for your home as possible.
Appraisals may help sellers get more for their home
Sometimes appraisals work in the seller’s favor if they come back higher than anticipated. This may attract more buyers since the home is worth more and spark bidding wars that can drive the price of your home up even further.
Cons to getting an early appraisal
While getting an appraisal is a necessary part of the home buying process, sometimes pre-listing appraisals may hurt the seller rather than help. Here are some reasons why you may want to think twice about getting an early appraisal.
- Early appraisals may not account for changing markets. The data gathered from an appraisal is usually based on recent sales of similar properties in your area. Sellers who purchase an appraisal today and don’t sell their home for several months may be at a disadvantage since the recent sales in the market may have changed. For example, if homes start selling for more during this time, sellers may need to order another appraisal or miss out on the changing market conditions.
- Extra cost. The seller pays for pre-listing appraisals, while the buyer pays for standard appraisals. Sellers should expect to pay $300 to $500 for a pre-listing appraisal, which may not be worth it to sellers strapped for cash.
- Differing of opinions between appraisers. If you get four different appraisers to estimate the fair market value of your home, you may get four different values. This is especially true when comparing a pre-listing appraisal with an appraisal ordered by the buyer.
Other reasons to get an appraisal
There are other less common reasons you may consider getting an appraisal, including:
Divorce cases often require a home appraisal for homeowners settling a divorce and splitting their assets evenly between each party. If one of the two people decides to stay in the home after the divorce is settled, their lawyers can determine how much one party owes to the other. Appraisals can also make it easier for couples to agree on the listing price if they decide to sell the home.
Filing for bankruptcy is another common situation where the homeowner may be required to sell their assets, including their home and any other properties they own. Bankruptcy may also result in a short sale whereby the bank attempts to sell the property quickly if the borrower goes into foreclosure.
Eliminating mortgage insurance
Borrowers with a conventional loan who made less than a 20 percent down payment will be required to pay mortgage insurance (or PMI) to the lender until their LTV reaches 80 percent or lower. If property values increase, borrowers may be able to eliminate PMI sooner and may want an appraisal on the home.
How much does a home appraisal cost?
There is no one-size-fits-all when it comes to the cost of an appraisal. The appraisal fee depends on several factors, including the location, size of the home, unique home features, and appraisal complexity. However, appraisals for average homes ordered by the lender typically cost about $300 to $500.
How to prepare for a home appraisal
Preparing for your home appraisal is essential if you want the most money for your home when it comes to selling. Below are some tips on preparing for a home appraisal and what to expect during the process.
- Take your curb appeal seriously. First impressions matter–even for a home appraiser. Homeowners preparing for an appraisal should clear all debris from their yard and give it a fresh cut and edging before the home appraisal. Touching up the paint on the home’s exterior can also help make a good first impression.
- Make minor repairs. There are some simple parts of your home that you can repair to increase the value of your appraisal. Fixing a broken door knob, squeaky door hinges, or chipped paint are minor repairs that can add value to your home.
- Review previous appraisals. Did you receive an appraisal when you purchased the home? Or maybe you refinanced a few years ago. Whatever the case may be, reviewing previous appraisals is a great way to see what lowered your home’s value in the past and what you can do to ensure it doesn’t do the same this time.
- Be polite and respectful. Believe it or not, being courteous and respectful to the appraiser can go a long way. Appraisers are bound by strict regulations, which means trying to influence their appraisal value is unethical and can get you into legal trouble.
Understanding an appraisal report
At first glance, appraisal reports may look complicated and seem hard to understand. However, knowing what to look for and how to read an appraisal report is important if you want to understand how the appraiser determined the value of your home.
The Uniform Residential Appraisal Report (or the 1004 form) provides an in-depth explanation of the factors the appraiser used to value your home.
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The first section contains basic information about the borrower and the property. The “Contract” section covers financial details associated with the property, while the “Neighborhood” section gets into the nitty gritty of valuing your home. This section also shows the area’s trends and the neighborhood’s characteristics.
The following sections of the appraisal report cover improvements, sales comparisons, cost replacements, and the income capitalization approach. Finally, your appraisal results are listed at the end of the report.
The appraisal process may seem daunting for those buying or selling a home for the first time. However, following the tips and guidance in this article puts you in the best position to have a positive appraisal experience and get the most for your home when it’s time to sell.
For more information on finding a real estate agent in your area to get the selling process started, check out FastExpert and visit our blog page for more helpful resources about real estate and the selling process.