What Does a Real Estate Appraisal Mean?

Sep 28, 2022
3 min

When a house is listed, the price is determined by the realtor and the seller after research and conversations. 

However, once the property is under contract, an appraiser will have to come in and confirm that the home is, in fact, worth the amount it’s being sold for. 

The appraisal process is a standard step in any real estate deal involving bank financing. 

But, problems can arise, and it’s essential to fully understand the appraisal's role in the real estate transaction.

What is a Home Appraisal, and How Does it Work?

A home appraisal is a third-party opinion of how much the home is worth based on the fair market value. 

During the appraisal process, a real estate appraiser will go to the home and take note of the home’s condition, what repairs might be needed, and how it compares with other homes nearby that have recently sold. 

Once complete, the appraiser will send a report to the mortgage lender and include a final determination of the property's value. 

Appraisals are required whenever a property purchase or sale involves a bank or mortgage, as the bank wants to ensure the home is sold for what it’s worth. 

An appraisal is also used to determine the property taxes the county will charge every year. 

What is the Difference Between Appraisal and Inspection?

Both the appraisal and inspection will look at a home’s condition and file a final report. However, they serve different purposes in the homebuying process. 

While the appraisal will judge the home’s value, an inspection is a more in-depth look at the home’s condition. 

The home inspection report will look at all home details like outlets, plumbing, electrical, and other major home systems to see what areas of the house may need repair.

The most significant difference is that an appraisal won’t uncover deeper issues in the home, and will simply outline the home’s valuation based on the required guidelines. 

That’s why it can still be recommended to get a home inspection to understand the home’s condition fully.

What Does the Home Appraiser Look for?

An appraiser will consider several things when determining the property's fair market value. Most appraisers use the Uniform Residential Appraisal Report that Fannie Mae publishes. 

This outlines the interior and exterior condition of the home, and requires a list of homes that are similar in location and size which have recently sold. 

This will ensure the property’s value is in line with current market trends and pricing. 

They will also conduct an in-person visual inspection of the property to judge the home’s condition and if any things would adversely affect the property’s value. 

The property’s appraised value is influenced by a lot of factors but can include things like the number of bedrooms, bathrooms, the floor plan layout, and square footage. 

What is a Home Appraisal Report?

Each appraisal report has a few standard sections that describe the home and how the appraiser reached the conclusion. 

Assuming the appraiser used the uniform report, it will outline several sections including:

  • The basic of your property like it’s address, parcel number, any HOA fees, and the type of transaction (purchase, refinance)
  • Information about the purchase contract like price, date, relevant parties
  • Characteristics of the neighborhood like it’s boundaries, if it’s designated as urban, suburban or rural, price trends and how developed the neighborhood is.
  • Your property’s size and the types of utilities
  • The details of your home’s condition and features. 
  • What similar homes in the area have sold for 

At the end of the report, the appraiser will outline based on all the above, what they estimate is the home’s fair market value. 

Who Pays for an Appraisal and How Much is it?

Since the appraisal mainly protects the lender, the individual buying the house or borrowing the money pays for the appraisal. Ranging in cost, you can expect the appraisal to cost several hundred dollars depending on how big the house is and the condition of the property. 

While most of the time an appraisal is required for a traditionally financed purchase, obtaining an appraisal can be valuable in a variety of transactions. 

For buyers, the appraisal confirms that they’re paying a fair price for the home. For the sellers, the appraisal confirms that the home is priced in line with others in the market.

What if the Appraisal Comes Back Lower or Higher than Asking?

If your appraisal comes in higher than the original price you’re planning to purchase the property for, you’re in good shape! 

This means that you will buy the house for less than the market value. The purchase price of the property won’t change, but you’ll be getting the home for a good deal.

However, on the other hand, problems will arise if an appraisal comes in lower than the property's purchase price. While this doesn’t happen frequently, it can happen, and it’s important to understand how to negotiate the process. 

Since the home's value is lower than the purchase price, a lender will only agree to loan the appraised value. This means the buyer will have to cover the gap between the appraised amount and the purchase price in cash. 

Or, if the buyer is unwilling to pay the difference, the seller might have to decrease the property's price to the appraised amount. 

This is why it’s important to have an appraisal contingency in place. If the appraisal comes in lower and the seller won’t negotiate on the difference, an appraisal clause will allow you to walk away from the deal and keep your earnest money deposit. 

Final Thoughts on Home Appraisals

The appraisal protects not only the bank but also provides a system of checks and balances for the buyer to ensure they’re paying a realistic price for their home. 

Protect yourself with an appraisal contingency and speak to your realtor to address any outstanding questions. 

With proper knowledge and understanding of the process, you’ll be prepared to handle the appraisal of your home with ease.

TL;DR: A home appraisal is the process of determining the true value of a home or property. This is done by a real estate appraiser and is recorded in an appraisal report.

Sep 28, 2022
3 min