Appraisals are typically a behind-the-scenes process in real estate transactions. But they can create headaches and heartaches when they don’t go according to plan.
There’s a lot of confusion around home appraisals, so I want to answer some of your questions and clear up some of the common misunderstandings about appraisals for our Connecticut buyers and sellers.
Here is everything you need to know about appraisals.
What is an Appraisal?
An appraisal is a professional opinion of a home’s value. I say “opinion” because real estate values are somewhat subjective. The fair market value of a home is however much a buyer is willing to pay on the open market. So it can be difficult for anyone (even industry professionals) to accurately predict how much a buyer would pay.
But appraisals are a necessary part of real estate. Buyers who are getting a home loan to purchase a property need an appraisal to assure the lender that the home is worth at least the amount being borrowed. Lenders need to be careful not to approve a loan for more than the home is worth. Consider this from the lender’s point of view: if the buyer fails to make their mortgage payments, and the lender has to foreclose on the property, they want to make sure the property is worth more than the amount they lent the borrower.
In fact, most lenders require that the home appraises for a specific percentage more than the loan amount. The loan-to-value (LTV) ratio is the amount of the loan as a percentage of the home’s value. And the required LTV ratio depends heavily on the borrower’s credit history as well as the loan type.
But appraisals aren’t just useful for buying a home. Appraisals are also often used to confirm the value of the home when a homeowner wants to refinance their mortgage.
What is Considered During an Appraisal?
Appraisals are a complex calculation based on the recent sales of comparable homes.
To arrive at a value for the “subject property” (the home they are trying to value), appraisers look at the sales prices of homes that are similar to that property. This is a difficult balance between similar properties and timing. There might be a home exactly like yours next door, but if it sold a year ago, that sales price would be too outdated to consider comparable. Similarly, the home next door may have sold yesterday, but if that home is dramatically different from your home, that sale is not comparable enough to help calculate the value of your home.
When choosing comparable properties to calculate your home’s value, appraisers typically consider factors like:
- Location,
- Square footage,
- Land area,
- Number of bedrooms and bathrooms,
- Year built,
- Condition of the home,
- Quality of construction,
- Views,
- Street traffic,
- Amenities (like a pool or finished basement),
- Date of the sale,
- And literally any other factor that could materially affect the value of the home.
With so many factors to consider, you can see why appraisals are somewhat subjective. One appraiser may prioritize one factor over another while another appraiser may prioritize factors differently. Appraisers undergo extensive training in an effort to standardize the process as much as possible. But with each home being unique, appraisal is as much an art as a science.
How Much Does an Appraisal Cost?
A home appraisal in Connecticut usually costs between $350 and $500. This amount covers the time the appraiser spends researching comparable homes, calculating a value, and preparing a report of the relevant information.
In a typical home purchase, the lender will order the appraisal and pay the appraiser, but then the lender will pass their appraisal cost along to the buyer. If the buyer is paying in cash, and no lender is needed, the buyer would pay the appraiser directly.
If an appraisal is required to refinance an existing mortgage, the lender will likely order the appraisal and pass the cost along to the homeowner.
What to Expect During Your Appraisal
You don’t need to do anything during the appraisal. Much of the appraiser’s work will actually be completed from their office. With so much information available online (and so much personal knowledge of the real estate market), appraisers can usually decide on comparable properties without personally visiting each comp. They may need to swing by the subject property to confirm a few details, but with the listing photos and virtual tours available online, this may not be necessary for homes that are currently listed on the market.
If you are getting an appraisal for the purpose of refinancing, you might just need to provide access for the appraiser to quickly walk through the home, but that’s all you would need to do. The appraiser would simply confirm the condition of the home, then get back to their office to complete their calculations.
Most often, the appraised value during a home purchase will be in line with the offer price. After all, if the home was on the open market, the buyer is willing to pay the offer price, and the seller is willing to accept the offer price, so the offer price is a good indicator of the value of the home.
But sometimes appraisals come in low, which can cause buyers to reconsider the offer price. Low appraisals can also cause lenders to limit (or even refuse) to finance the purchase of that home, which can cause the deal to fall apart.
It is also possible for appraisals to come in high. In this case, buyers typically decide not to share the appraised value with the seller. If the seller knew that the appraised value was higher, they might be tempted to try renegotiating the price. Buyers are within their legal rights to withhold this information from the sellers.
What if I Disagree With the Appraiser’s Value?
Having an experienced real estate agent in your corner is critical when an appraisal comes in low. Your agent will understand the market, know the comps the appraiser chose (and ignored), and recognize any wiggle room in the appraised value.
Your agent can review the appraisal to look for errors in the data used and determine whether or not the chosen comps are fair.
If there is an error, you can request a revision. For example, if the square footage on the appraisal does not match the confirmed square footage on the County Assessor’s records, the value would need to be recalculated based on the correct square footage.
If the comps are questionable, you can ask the appraiser to defend the comps they chose and/or consider different comps.
You could even ask for a second appraisal. Because home values are somewhat subjective, a different appraiser might calculate a more favorable value.
As a buyer, if we find that the appraiser’s low value is correct, you have a few options:
- Increase your down payment to cover the amount between the offer price and the amount the lender is willing to loan based on the low appraised value,
- Try to find another lender who will loan the amount you need, despite the low appraised value,
- Or, as a last resort, you can walk away from the deal.
Is an Appraisal the Same as a Home Inspection?
A home inspection is entirely different from an appraisal. A home inspection is a physical assessment of the condition of the home from a functional standpoint. This is typically needed by buyers who want to understand the condition of the home before finalizing the purchase or by buyers who want to know if there are potential issues before they list the home for sale.
A certified home inspector visually inspects homes and documents the condition of the structure and systems, including:
- Windows and doors,
- Walls, ceilings, and floors,
- Foundation and basement,
- Other structural components,
- General electrical system,
- Heating and cooling systems (temperature permitting),
- General plumbing, and
- Roofing and attic.
Is an Appraisal Required?
The appraisal is not a legal requirement to purchase a home, but it is typically required by any lender considering extending a home loan on the property.
If you’re paying all cash for a home, you have the option to skip the appraisal entirely. And if you’re investing a substantial down payment (typically more than 20%), you might get the lender to agree to waive their appraisal requirement.
Waiving the appraisal is a strategy used by buyers in a hot seller’s market where multiple buyers are competing for the same home. See, a “normal” purchase contract contains an appraisal contingency that allows buyers to back out of the deal if the property doesn’t appraise for the purchase price. This contingency makes sellers nervous because the buyer might cancel the contract, leaving the seller to start all over and find a new buyer. But if a buyer waives the appraisal contingency, it means they agree to buy the property even if the appraisal comes in too low. So the seller gets additional assurance that the deal will close as scheduled. This makes sellers more likely to accept offers that waive the appraisal contingency.
What are the Pros and Cons of Waiving the Appraisal?
To reiterate, you can only waive the appraisal contingency if:
- you are paying all cash or
- if you are making a large down payment and the lender agrees to waive their appraisal requirement.
If you qualify to waive the appraisal contingency, there are pros and cons to consider before doing so.
The pros of waiving the appraisal are:
- You increase your chances of getting your offer accepted.
- You won’t need to pay for an appraisal.
The cons of waiving a home inspection are:
- You might end up paying more than the market value for the property without realizing it.
The Bottom Line
Appraisals are a professional opinion of the value of a home. They are typically done for the benefit of the mortgage lender. The lender needs the assurance that the property is worth a certain amount over the loan amount (the exact amount depends on several factors including the loan type and the borrower’s credit history).
Appraisals are not legally necessary to purchase a home, but they are required by lenders, so they are effectively necessary for any buyer who needs a home loan. If you’re investing a large down payment or making an all-cash offer, you can waive the appraisal contingency. But make sure you discuss your options with an experienced real estate professional before doing so.
Whether you’re buying or selling, it pays to have a REALTOR® in your corner to help you navigate the complexities of real estate transactions. Contact me for a free, no-obligation consultation to learn more about the process and how I can help you take advantage of current market conditions in Central Connecticut.
