Home appraisals are a hot topic in competitive real estate markets such as the 2023 Hampton Roads housing market. In this guide to residential real estate appraisals, we’ll break down what home appraisals entail, how they work, and why they are important for both buyers and sellers.
What is a Home Appraisal?
A home appraisal is a third-party evaluation that determines the value of a house, performed by a licensed appraiser. Appraisals are nearly always done during the process of buying a home, and they can also be a part of the refinancing process for current homeowners and/or used as a tool for home sellers to accurately assess their home’s value before listing it.
This guide focuses primarily on the appraisal process that occurs while a home is under contract to be sold, but the process is generally the same in all cases. One major difference in appraisals done for refinancing purposes (and sometimes as a home seller) is that, because you are the homeowner, you can attend the appraisal in person.
During the homebuying process, an appraisal is typically ordered by the homebuyer’s lender once a buyer is under contract. Appraisals include a report evaluating the property’s features, general condition, a list of comparable properties that have recently sold, and a final valuation of the property being assessed. The appraisal report verifies the value of the home so that the lender can officially approve a loan for their client to purchase a specific home.
What Do Real Estate Appraisers Look For?
Licensed appraisers thoroughly inspect real estate properties to assess their true worth - which isn’t always the same as what it’s listed for.
Property appraisers will use the buyer’s loan type and criteria set by the lender to evaluate certain items in and around the home, such as the house level (one or two story) as well as features like yard size or if the home has a garage. Appraisers also look at comparable homes that have recently sold in that area to help determine the value of the home.
Appraisers, licensed by state, provide a pass-or-fail evaluation of the home’s value. A home that passes the appraisal is identified as appraising “at value” - the value being the sales price that the buyer and seller have previously agreed upon. The goal is for the sales price to be at or below the appraised value of the home; if not, negotiations could resume and closing on the property could be delayed.
Why are Appraisals Important for Homebuyers?
Appraisals are one of the most important steps in the home-buying process. A property appraisal is one of the requirements lenders have to approve and process a home loan, enabling a buyer to move toward closing on the house. A bank does not want to give out a loan amount that exceeds the value of the home, because if the buyer defaults on the loan, they won’t be able to sell the property for enough money to cover their loss.
Home appraisals also provide homebuyers with peace of mind when purchasing a property. The appraiser provides information on comparable homes that have recently sold in or around the neighborhood, providing insight on the home’s worth based on similar features, size, and characteristics. Appraisals help ensure the buyer of the value of the home they are buying.
Why are Appraisals Important for Home Sellers?
It’s not just the buyer that can benefit from an appraisal. Many sellers choose to get a “pre-appraisal” before listing their property for sale. This allows them to assess what size loan a potential buyer will be able to get, and they can list their house accordingly to aid in an easy sales process.
Although the appraisal is ordered by the buyer’s lender, it does not mean the buyer has any control over the appraiser. The appraisal itself is not performed by the lender or buyer, but by an unbiased third party who uses a pretty strict formula to determine the home’s value.
Appraisals are important to sellers because they can confirm the value of their home before they list. Once the appraiser confirms the value of the property, there is a clear picture of the equity that the home has accrued, and the seller will know how much, if any, return they will receive from the property being sold.
Is an Appraisal Different from a Home Inspection?
Yes. While appraisals center on the value of a property, home inspections focus solely on the condition of the home.
Buyers have home inspections completed to do their due diligence in assessing the state of the home they are about to purchase. Often, buyers will attend a home inspection for their personal education on the safety and condition of the house and its systems, such as sewage, HVAC, and water. Inspections can lead to further negotiations between the buyer and seller, but they are not typically required by the lender to determine the amount of a loan.
While an appraisal is mandatory for securing a loan, home inspections are technically optional. However, the idea that you should waive a home inspection to make your offer more appealing is one of the biggest real estate myths of 2023. Inspections can provide very valuable information about the investment you are making as a homebuyer.
How Much Does a Property Appraisal Cost?
There are several costs to be mindful of when purchasing a home in Hampton Roads, including the cost of the appraisal. Because appraisals are non-refundable, they are completed after all contingencies (such as a home inspection) have been met and are usually one of the last steps completed before the purchase is complete. This protects the buyer from having to pay for an appraisal if the deal falls through.
Several factors influence how much an appraisal will cost, including the type of loan the buyer procures, the city where the house is located, and the size of the property. The typical home appraisal in Hampton Roads, Virginia costs between $400-$800.
How Long Do Real Estate Appraisals Take?
After the lender orders an appraisal, it may take a couple weeks for an appraiser to be able to schedule a visit to the property. Depending on the size and location of the property, appraisals themselves can take anywhere from 15 minutes to several hours to complete. The appraiser will then generate the report, which takes from a few days to a week (or even longer in a busy, active housing market).
Overall, prepare for a 2-3 week appraisal process from the time the lender puts in the order.
What if the Agreed-Upon Purchase Price and the Appraised Value Don't Match?
Let’s say the Brown family agreed to purchase the Wilsons’ house in Virginia Beach for $300,000. If the appraiser finds that its value is indeed $300,000, they will give it a passing score indicating the home was appraised “at value.”
If, however, the Wilsons’ home appraises at $310,000, the Browns do not have to add an extra $10,000 to their offer. In this scenario, the Browns purchase the home “below value” and are starting their homeowners journey with an extra $10,000 in equity.
If the appraiser finds the property’s value to only be $290,000, they would give the home a failing appraisal score. An appraisal that values the home lower than the agreed-upon purchase price isn’t necessarily a deal breaker. Instead, further negotiations can take place between the buyer and the seller.
Here are a few common outcomes that occur after a low appraisal is distributed by the appraiser:
The seller lowers the sales price to the appraised value so the buyer can receive their loan.
The buyer increases their cash down payment to pay the difference.
The buyer and seller split the difference between the agreed sales price and appraisal value.
The seller submits a request for an appraisal rebuttal.
If all else fails, the contract is terminated.
In a seller’s market like the one we're predicting in 2023, where there is limited inventory and high demand, buyers often need their offers to stand out to win a home. This often means increasing the purchase price and guaranteeing to pay the difference in appraised value (if one exists).
Since the appraisal happens towards the end of the transaction, it is not always beneficial to cancel the contract, but rather find an alternative solution. For a buyer to be aware of the best options and solutions available during the buying process, it is always best practice to have a real estate professional represent you during the transaction.
How Can a Seller Appeal a Low Appraisal?
If the buyer hasn’t guaranteed to make up the difference in cash, a low appraisal may mean less profit for the seller once the transaction is complete. Often, appealing the appraiser’s decision before closing can be in the seller’s best interest. Here are a few different options a seller can prepare, with the help of their real estate professional, for an appeal of the initial home appraisal:
State additional comparable properties that would have increased the estimated value and may have been missed.
Provide information to show why a specific comparable property sold should not have been used (a foreclosure or distressed sale, poor condition, etc.).
While appealing a low appraisal is possible, the chances of changing an appraiser’s mind are slim without solid evidence proving the reported value is off. Always make sure your rebuttal presentation is professional and detailed!
Refinancing and Home Selling Appraisals
Appraisals aren’t just for the homebuyer. Current homeowners and soon-to-be sellers may also seek a real estate appraisal.
Refinancing a mortgage usually requires a new appraisal of your current home. You’ll be looking for an appraisal value that meets or exceeds the amount you hope to refinance to get approval for your loan.
The process for refinancing appraisals is very similar, with the key exception that you are typically allowed to attend the appraisal itself. As the homeowner, you can take advantage of this to point out upgrades you’ve made or features you don’t want the appraiser to miss.
Those listing their home on the market might also be interested in getting an appraisal to help determine the list price of their home. A pre-appraisal can help you list your home effectively and quickly in a hot market such as 2023. However, it’s important to note that the buyer’s lender will likely not accept an appraisal ordered by the seller (as they will want to make sure their unbiased third-party appraiser has a say).
The Bottom Line
Appraisals are an influential (and sometimes a make-or-break) step in the homebuying process. Both buyers and sellers should approach the process with full knowledge of how real estate appraisals work and how they will handle the various outcomes of appraisals that may result. Make sure you have an expert real estate professional on your side from the beginning.