Appraising a house is a necessary part of the homebuying process. It protects both the lender and the buyer, real estate professionals told Homes.com.
“A few hundred bucks on an appraisal can save hundreds of thousands on a mistake,” said Jackie Coffey, a Dallas-based real estate investor who has flipped hundreds of homes.
Appraisals verify a home is worth what you'd pay
An appraisal is an estimate of a home’s true value that's done by a licensed professional, said Steve Afra, founder of Nvestor Funding in Nashville. Lenders require it because they want to make sure the home is worth the amount they have been asked to lend, he said.
Appraisers are licensed by a state and are a neutral third party, said Steven Parangi, manager at Alpine Mortgage Services in Rochelle Park, New Jersey.
An appraiser visits a property to inspect its physical features, such as the size, condition, upgrades and lot, he said. They also dig through the Multiple Listing Service to see what similar homes in the area have sold for.
The information goes into a report that compares the property to three similar homes that recently sold, Parangi said. The process usually takes seven to 10 days.
The report adjusts the value of the home for amenities, improvements and specific location, he said.
Know the difference between an appraisal and an inspection
Buyers shouldn’t confuse an appraisal with an inspection, said Chad Barker, CEO at Velox Valuations in the Indianapolis area.
An appraiser will look at aspects of a house that are readily observable, Barker said, but an inspector pokes and prods, getting on a roof, looking down a chimney, inspecting the plumbing and checking to see whether all the electrical outlets work.
Know the difference between an appraisal and a tax assessment
A tax assessment is an estimate to determine a property's value for tax purposes. They are distinct from appraisals.
An appraisal is a snapshot of the market value of a property at a specific moment in time. It is more extensive and detailed than a tax assessment, according to Experian. An appraiser will visit a property, photograph it and calculate its present value based on its attributes such as square footage and number of bedrooms, Experian said. An appraiser also will take into account a more detailed analysis of a home's improvements, such as a finished basement.
A tax assessment is often done periodically and is more of an estimate of a property's value, according to Experian. An assessor will drive by properties in a neighborhood to determine their value instead of visiting each. They will consider attributes like square footage and bedrooms but not detailed improvements. Some municipalities use a percentage of the property's value when calculating its tax, Experian said. Assessed values often are lower than appraisals, it said.
Who pays?
Lenders order the appraisal after a buyer completes a loan application, said Parangi. The buyer almost always pays, even though the lender technically owns the report.
The cost of an appraisal varies from about $300 to $500, with an average cost of $379, according to Thumbtack.com, a San Francisco-based firm providing information to consumers planning home projects.
A low appraisal doesn't have to end a deal
Buyers have several options if the appraised value is less than the sales price, said Parangi. They can renegotiate the price, increase the down payment to cover the difference or challenge the appraisal.
Real estate professionals disagree on the effectiveness of the challenge.
A challenge rarely succeeds unless an appraisal is clearly inaccurate, said Jessica Vance, who owns Jessica Vance Real Estate and Mortgages in San Diego. She advises her clients to get the seller to accept the full price reduction.
“There is no reason a buyer should pay more than an appraised price, in my opinion,” she said.
Buyers have leverage because the appraised amount stays with the seller’s property for federal loans, giving the seller an incentive to negotiate instead of looking for a new buyer, she said.
The property cannot be reappraised for 180 days for Federal Housing Administration loans and 120 days for Veterans Administration loans.
Coffey, however, said she’s had better luck challenging an appraisal. “Appraisers are human, and they make mistakes,” she said, noting that about 20% are inaccurate.
Challenging an appraisal paid off for Coffey during a project in which she flipped a trio of homes on the same street. Two of the homes appraised for $205,000 and $210,000, what she had expected, but the third was $50,000 below market value.
Coffey knew the area’s comparables and ordered a second appraisal. It came in $52,000 higher than the first, she said.
“If your appraisal comes in low, it’s not the end of the world; it’s the beginning of negotiations,” said Coffey. “It is definitely worth it to push back as long as you know the comps and your numbers are in the right place.”
Making a contract contingent on the appraisal is a savvy buyer move, said Coffey. An appraisal contingency is a clause in the purchase contract that allows buyers to walk away if the house fails to appraise for the purchase price.
New methods speed up the process
A recent development in the process is the hybrid appraisal, said Adam Hamilton, CEO of REI Hub in Richmond, Virginia. In a hybrid, the appraiser hires a third party to do the work.
“Using another person to do this while they conduct the market analysis is ultimately meant to get the job done faster, which can definitely be a pro,” Hamilton said.
Hybrid appraisals are not as precise as traditional ones, but are still considered accurate, Hamilton said. “You’re not going to get a poor result, because accuracy is essential to appraisers.”
An aging workforce leads to shortages
The number of appraisers has declined in the past 10 years, said Erik Morin, the CEO of Atlas VMS, a Miami-based valuation management company. Those that remain are an aging population who will retire sooner than new appraisers can train to take their place, he said.
Many if not most appraisers are over the age of 50, said Cliff Auerswald, the president of All Reverse Mortgage in Orange, California. "If this trend continues, it will lead to even greater scarcity of appraisers in the real estate market. In smaller and more rural markets, there are already signs of a shortage of appraisers to serve those areas," said Auerswald.
So far, there's no data showing that the shortage affects the quality of appraisers, Morin said, but it is causing delays. Hybrid appraisals help, he said.
Some loan programs are adjusting by no longer requiring appraisals, said Morin.
While the number of appraisers is declining, technology has made those remaining much more productive, said Barker, the Indianapolis appraisal firm CEO.
"Twenty years ago, appraisers were snapping 35mm photos and gluing them into reports," he said. "Now, everything is digital, and we’re also using other tools like laser-measuring devices and even scan-to-sketch technology."
A new crop of trainees is entering the profession, he added.
"Long term, we remain very bullish on the profession," he said. "The demand for accurate, credible valuations will always be there, and the new generation of appraisers has a strong runway ahead."