Homebuyers

Home Appraisals: Why They Can Make—or Break—a Deal

When you’re buying a home, there are a lot of moving parts to keep track of to get across the mortgage-closing line.

One of the most important—and often misunderstood—parts is the home appraisal. Since it can be one of the more complicated aspects of the transaction, many homebuyers and home refinancers tend to underate its significance.

That’s a mistake because the appraisal, which calculates the fair-market value of the property, can make or break the deal. Lenders typically require an appraisal before granting a mortgage or home improvement loan.

“An appraisal helps the borrower who may have limited knowledge of real estate make better decisions,” says Sandra Adomatis, a senior residential appraiser at Adomatis Appraisal Service in Punta Gorda, Fla. She is also the president of the Appraisal Institute, the leading professional association of real estate appraisers.

If a homebuyer getting a mortgage offers more than the appraiser says the home is worth, buyers may have to renegotiate with the seller or come up with extra money to save the deal.

Appraisals can also impact homeowners applying for a refinance or home improvement loan.

Generally, the lender chooses the appraiser and the homebuyers foot the bill. Appraisals typically cost $400 to $650, depending on where the home is based and the complexity of the job.

“Buying a home is one of the or the biggest investments you make in a lifetime,” Adomatis says.

Waiving a home appraisal contingency is risky

In most home-sale contracts, there’s an appraisal contingency. That’s basically an escape hatch that allows buyer to pull out of the deal if the appraisal values the home for less than the agreed-upon purchase price.

Homebuyers waiving the contingency do so at their own risk. If the appraisal comes in under their offer, the buyers may be on the hook to make up the difference if they are taking out a mortgage.

Buyers paying all cash may choose to opt out of it.

“The appraisal contingency protects the buyer,” Adomatis says. “Without it, the purchaser would be required to close on the home for the contract price, even if the buyer can no longer get the amount of mortgage needed.”

What home inspectors analyze to value properties

Appraisers consider a variety of factors when they are valuing a home.

These include the home’s location; condition; age; if it offers any spectacular views; the quality of construction; floor plan; energy efficiency and the extras. These can be pools; accessory dwelling units (ADUs); outdoor amenities like decks and porches; and other standout features or improvements.

Unlike home inspectors, they are not looking for defects in a home unless those problems affect the value. While they generally visit the property, they also look at recent sales, listings, and pending sales of comparable properties, or “comps”, in the neighborhood.

This helps them to figure out how much similar homes sold for and how much this home may be worth.

This information is crucial because if the lender decides that the buyer is paying an inflated price, it will not grant the loan unless the buyer pays the difference.

Before you get mad at a low appraisal, it’s helpful to know that these professionals have no financial investment in the outcome. They must also take a set of qualifying education classes, pass exams, and earn training experience before they can make an appraisal.

Appraisals can be challenged by homebuyers and homeowners

Buyers and homeowners can ask for a re-do of their appraisals if they are unhappy with the valuation. This is called a reconsideration of value or ROV.

To do so, they must request a ROV form from the lender to correct any errors. The lender reviews the filled-in ROV and sends it to the appraiser to figure out if there are valid reasons for reconsideration.

Since real estate deals take time to execute, comps may take some time to catch up with current list prices. This can happen in super-hot markets where bidding wars push up prices at warp speed. That may force appraisers to rely on older data that may have lower prices.

When the comps do catch up, real estate agents often use them to re-calibrate prices on new listings to provide a more accurate picture of the current market.

“A well-conducted appraisal balances market realities with the property’s specific features, providing an accurate snapshot of its value at that moment in time,” said Marcus Hill, a licensed appraiser based in Little Rock, Ark.