What You Need to Know About Home Appraisals

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Young Family with Real Estate Agent in Front of New House
Getty ImagesYou can't get money from a credible financial institution without an appraisal, so, they're pretty important.
By Geoff Williams

When you think about buying a house, you think about the plentiful cabinet space you hope to find in the kitchen, or ample bedroom size. You probably aren't thinking about the home appraisal.

If you're selling a home, you're probably daydreaming about the home you plan on moving into next. You're probably wondering how much you can sell your home for, too.

But whether you're selling or buying, you probably aren't thinking much about the home appraisal process. It isn't one of the most glamorous parts of buying or selling a home, and yet if home appraisals disappeared tomorrow, the real estate market would come crashing down.

So if you're about to buy or sell a home and know little about appraisals, it's time to change that.

What are they? A home appraisal is a very educated guess as to how much your property is worth.

Why are home appraisals important? No credible financial institution will lend you money for a house without an appraisal.

%VIRTUAL-pullquote-The appraisal lets a bank or lender know what the loan collateral will sell for in a worst-case scenario.%"The appraisal lets a bank or lender know what the loan collateral will sell for in a worst-case scenario," says Bart Jackson, an appraiser in Charleston, South Carolina, who is also a real estate agent with Charleston Preferred Properties, a residential real estate brokerage firm.

In other words, to go with an extreme example, the bank doesn't want to be stuck with a home they lent the borrower a million dollars for but can only sell for $100,000 because that's all it is worth. The homebuyer shouldn't want that either, of course.

So appraisals exist for good reason, but what can make them a tense time for all parties is that they're conducted after you've negotiated a price, agreed to buy or sell the house and signed the contract. So it's in everyone's best interest that the appraisal is close to the price that both seller and buyer have agreed on.

That said, if it turns out you're about to buy a house for a wildly inflated price, that doesn't necessarily mean you're obligated to buy the house. But if you aren't careful, it could mean just that.

The sales-and-purchase agreement should address the possibility that your appraisal comes in below the purchase price, and allow you to terminate the contract or renegotiate the price, says Robert Pellegrini, a real estate attorney based in Bridgewater, Massachusetts.

"If not, you could be obligated to cover the difference for a lowball appraisal, and that could mean you're on the hook for thousands," Pellegrini says.

Who pays for the home appraisal? Usually, it's the seller who pays for it at closing, which can be as high as several hundred dollars. The national average cost for a property appraiser is $309, according to data compiled by HomeAdvisor.com.

How do home appraisals differ from home inspections? The two often get confused, but they aren't the same thing. Both an appraiser and inspector will walk around the house and take a good look at it (usually, the inspector comes first), but they're each at the house for different reasons. The appraiser is looking at the value of the home; the inspector is looking for any defects with the home that may cause you financial grief later.

Of course, if the appraiser notices a problem, she won't ignore it. If the appraiser spots a leaky sink or some loose wiring, she may request an inspection, says Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh.

How long does the appraisal process take? It used to take a couple of days, but in recent years, ever since the recession -- when federal guidelines changed the appraisal process -- it's more often a week or two. Underwriters can request more information about the house than they could in past years, and gathering that data and photos can take time for the seller and real estate agent, which can mess up the closing date, putting everyone on edge.

What factors go into deciding the worth of a house? Plenty. "The appraiser is looking at the key characteristics of the property including square footage, number of bedrooms and bathrooms, condition of the home, current recently sold comparables that are close in proximity and health and safety issues," Titsworth says.

That said, most real estate agents will tell you that it's the recently sold comparables -- that is, houses that are similar to your own -- that are the main factors in appraising a home. It's all about property values.

If you're a homeowner, what can you do to improve the process? Nothing, once it starts. "You're powerless during the appraisal process," Pellegrini says. But before the appraiser comes by, you can take these common-sense steps.

"It's important to have the property look as good as it possibly can. You want to help the appraiser see your property's potential so they will possibly reconcile a value closer toward the upper end of the range," Jackson says.

After all, appraisers are only human. You could have a really cool house easily worth between, say, $300,000 and $325,000, but if it's junkie, it's easy to imagine the appraiser coming down closer to $300,000.

To that end, Jackson says the day the appraiser comes, the lawn should be mowed, the landscaping weeded and the bushes trimmed. Clean the house. Get out the air freshener. Turn on the lights and open the blinds, Jackson says.

"It's also very helpful to sit down the day or night before the appraiser arrives and make a list of repairs and improvements that have been done to the house over the past several years," he says.

So if you've put on a new roof or bought a new hot water heater, let the appraiser know, Jackson says. "Note anything you can think of -- the appraiser will decide what is important to the value. It does not have to be formal or detailed. Just thoughtfully note everything so you can give it to the appraiser before he or she leaves."

But don't get too excited if you've spent a lot on repairs and renovations. Your $30,000 kitchen remodel may help the appraisal, but it won't automatically mean your house is worth an extra $30,000.

What a good real estate agent will do. If you're selling the home, your agent will be there to meet the appraiser and share the home improvements you've jotted down -- and offer other data as well.

"In the past, we would just meet the appraiser to open the door so that they could view the home," says Josh Muncey, a real estate agent in Jamaica Plain, Massachusetts. Now, Muncey will come armed with a folder of information on comparable homes that justify the sale price.

"We even call around to other brokers to ask what other properties that have not closed yet are currently under contract for since they are often slated to sell for a price well above asking, and it's critical that the appraiser has this information."

Basically, says Melissa Terzis, a real estate agent in the District of Columbia: "The more information a seller and their agent can give an appraiser that they can't find out just from checking the listing and walking through the home, the better."
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