Whether you’re selling your home or refinancing, one of the next essential steps will be to get a home appraisal. Initiated by the lender and usually paid for by the buyer, a home appraisal is essentially an expert’s opinion of what your home is worth. The appraisal assures the lender that the buyer, or borrower, is not overpaying for the home.
Why does the lender care?
Lenders generally loan only a percentage of the appraised price, not the contract price. This is why buyers and sellers are often on pins and needles wondering whether the “home will appraise,” meaning whether the home appraiser agrees that the home’s contract price is truly the home’s market value.
Appraisers are trained and licensed professionals who must follow strict regulations to provide an impartial opinion on the value of a home. Appraisers look at the square footage of the home, the number of bedrooms and bathrooms, the home’s condition, its location, and recently sold comparable houses to determine a home’s worth.
As a seller, you don’t have much say over the outcome of an appraisal, but you can control one important factor: your home’s condition. To help ensure your home appraises for your asking price, make sure you do everything you can to get your home in top shape.
How to prepare for a home appraisal
It’s wise to be proactive in making sure your home is in good shape before an appraisal. But you shouldn’t go overboard by spending or doing too much. Your goal is to have your home appraise for your asking price. If you spend too much money on improvements that won’t necessarily get you a higher appraisal, you waste that money. Here are some tips on what you should consider doing and what you probably should not do.
1. You should maintain your home
Besides deep cleaning your house and removing clutter, go around the home to check for maintenance issues. Here are some problems to look for that either you or a handyman can fix:
- Running toilets
- Clogged drains
- Squeaky doors
- Kitchen drawers that don’t close properly
- Nail pops
- Burned out light bulbs
- Dirty or stained carpets
- Clogged gutters
- Neglected landscaping
2. You should hire a professional
Hire a professional for any big jobs that need doing, such as the following:
- Plumbing problems such as dripping faucets, leaky pipes, low water pressure, installation of a new sink or bathtub, and fixing or replacing the water heater
- Electrical projects such as installing a new light fixture or ceiling fan, updating the electrical panel, and adding outlets or outdoor lighting
- A leaky roof
- Painting the interior and exterior of the home
3. You should not start major projects
Right before the appraisal is not the time to tackle major projects or renovations, such as adding a room to increase your square footage or turning the garage into a bedroom. Although certain upgrades can make your home more attractive to potential buyers, they don’t always mean a higher appraisal.
If you make renovations, and they do bring a higher appraisal number, there’s no guarantee that number will be as much as what you spent. A good rule of thumb is to look online at the comparable homes for sale in your area. You want your home to have features similar to the other homes.
What to do during the appraisal
Your real estate agent probably asked you to leave your house when prospective buyers were coming over. But when the appraiser comes by, you can—and should—stay. (You might wish to make arrangements for your dog, though.) If you can’t be there during the appraisal, ask your real estate agent to meet the appraiser at the home. Here are some tips on what to do (and what not to do) during the appraiser’s time at your house.
1. Inform the appraiser of your home’s features
Provide the appraiser with a written list of all the extra features of the home and of any improvements you’ve made, such as a new HVAC system, a new roof, a sundeck, a renovated kitchen or bathroom, or a finished basement. Although these features might be obvious, there’s a chance that something might inadvertently be left off the appraisal report. Having a written list can help your appraiser remember to include everything.
2. Show the appraiser the recently sold comparable homes
By finding out the selling price of the recently sold homes in your area that are similar to yours, you get an idea of the market value of your home—what people have paid for a home like yours. If you’re using a real estate agent, you probably have a comparative market analysis, or CMA, a report that helped you and your agent determine your asking price. A CMA considers your home’s age, location, size, and condition for comparison purposes. Note that if you don’t have a real estate agent, you can do your own analysis by looking online for recently sold homes in your area.
You and your real estate agent probably know your market well, but your appraiser might not. Therefore, it’s a good idea to provide your appraiser with your own list of comps to ensure the homes being compared with yours are true comparisons. Here’s why:
- Your appraiser might unintentionally compare your home with a foreclosure or short sale, which could bring down the price of your home.
- Your appraiser might unknowingly compare your home that has upgrades with a home that does not.
- Your appraiser might mistakenly compare your location that has a beautiful view of a park with a property that overlooks power lines.
By providing what are truly the best comparisons, you can help get a more accurate appraisal. Note that the appraiser might not consider the comps you provide. But it’s still a good idea to have them in case you need to appeal your appraisal later.
3. Don’t bother the appraiser
It’s fine to meet with and give your appraiser a list of your home’s features, upgrades, and comps. After that, leave the appraiser alone, unless you are asked for a home tour. Following your appraiser around and constantly talking might hinder the appraisal process and could irritate your appraiser. Whatever you do, don’t try to influence the results by pressuring or threatening your appraiser.
After making sure the appraiser can easily access all areas of your home, let your appraiser know where you will be in the house in case there are any questions. Appraisers want to see as much of the home as possible, such as flooring, walls, all the rooms, the appliances, and electrical outlets.
What the results mean
After a few days to about a week, you should receive the appraisal report. The appraised value of your home might be more than, the same as, or less than your asking price. If the appraisal comes in the same as your contract price, all is well, and you can continue with the deal. But what happens if the appraisal is higher or lower than the contract price?
If the appraisal is higher
If your house appraises higher than what you agreed to sell it for, it’s natural to second-guess yourself and wonder whether you set the price too low. Unfortunately, you can’t go back and renegotiate the deal in the hopes of getting a higher price from your buyer. Likewise, you can’t kill the deal altogether to start over with a higher asking price. You priced the home in good faith and found a buyer. Besides, if you asked more for the house, it might not have sold. So don’t waste your time fretting over this. Be happy that your deal went through.
If the appraisal is lower
If your house appraises for less than the contract price, your buyer won’t get the entire loan amount since the loan is based on the appraised value, not the contract price. Don’t despair, though. There are still some things you can do to save the deal.
1. Ask for a value appeal
Appraisal reports are long, detailed, and partly subjective, which creates plenty of opportunities for mistakes, omissions, and skewed opinions. You can appeal the appraisal if you find errors. Some grounds for an appeal include the following:
- The appraiser used comps that were not comparable to your home, neglecting to use more recent and better comps.
- The appraiser did not include home improvements you’ve made.
- Your neighborhood is up-and-coming with new amenities and rising home prices, but your appraiser valued your house based on older sales.
- The appraiser got basic information wrong, such square footage, lot size, or number of bedrooms and bathrooms.
When you make a value appeal, the appraiser typically reviews the appeal and either reevaluates the property or, if not, explains the misunderstandings. If mistakes or omissions are found to exist, the report should be corrected with a new value assigned.
2. Pay for a second appraisal
You could go back to the lender to request a second appraisal, which you would pay for. The cost varies based on the size of the house and its location. Expect to pay between $300 and $750 for a home appraisal. Keep in mind that there are no guarantees. A second appraisal may or may not produce the results you want.
3. Ask the buyer to make up the difference
Your buyer still qualifies for a loan when there’s a low appraisal. The problem is that the loan will not be enough to cover the contract price. One solution is to ask the buyer to come up with enough cash to cover the difference. If that isn’t possible, maybe the buyer can pay some or all the closing costs.
4. Lower your asking price
You could lower your asking price to align with the appraised price. That way, your buyer could still get enough of a loan to buy your home. If you don’t lower the price, and you lose this buyer, you’ll need to go through the sales process all over again, including another appraisal. There are no guarantees you’ll get a higher price the second time around. If the house appraised low this time, it might appraise low with a new buyer.
A home appraisal is an integral part of the home buying and selling procedure, so you need to take it seriously by doing all you can to help ensure your home appraises for your contract price. If you have further questions on how home appraisals work, contact a loanDepot licensed lending officer who can help you better understand the process.