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Home appraisals: Are they the best home valuation model?

Appraiser looking at a large piece of paper in an empty living room space
David Sacks/Getty Images
Appraiser looking at a large piece of paper in an empty living room space
David Sacks/Getty Images

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Whether you’re looking to buy, sell, or refinance your home, a home appraisal is a key part of the process. Home appraisals are one of the most important tools for determining the value of a property.

Home appraisals can be done for several reasons: They often play a part in evaluations for homeowners insurance, for example. In buy/sell transactions, they’re commonly ordered up if the buyer is seeking financing — the mortgage lender wants to see if the agreed-upon purchase price for the home is in line with its assessed value. It may adjust the size of the loan based on the home’s appraised value.

So it’s instrumental in determining the price of a home, the size of the mortgage, finalizing the sale of a property, or many other transactions involving your home. This is everything that you need to know about home appraisals.

Home appraisals process

A home appraisal is conducted by an independent real estate appraiser who has been professionally licensed to assess property values. Through the appraisal process, they will conduct a thorough review of the home, including touring the property and evaluating its condition. They will also take into account different market factors, including finding comparable properties, aka  “comps,”, that have similar features and qualities and have also sold recently in the same general area as the home being assessed.

After performing this review, the appraiser will produce an appraisal report. This report — typically the Uniform Residential Appraisal Report produced by Fannie Mae — includes a description of the home’s interior and exterior, details about its construction, information about the neighborhood, and recent comparable sales. The report includes insight from the appraiser, as well as a final appraised value. This figure is the fair market value of the home.

Home appraisal vs home inspection

While home appraisals and home inspections share some qualities, they are not the same. Home inspections seek out specific potential problems that a property might have, from cosmetic damage to more serious structural issues that need immediate or eventual repair.

Home inspectors do not make a determination about the value of the property, but rather the condition it is in. Appraisals are more of a broad stroke assessment meant to determine a fair market price, assuming all things are in working condition.

What do appraisers look for?

Appraisers take into account several factors when looking at a property. They consider the living conditions of the home in an impressionistic sort of way. Any visible damage or issues will be taken into account, but the appraiser will not typically look behind the walls to see the inner workings of the property. It is more of a visual assessment of the property’s general, outward-facing condition.

Appraisers take note of home improvements and upgrades. Noticeable fixes, major remodels or additions, and features that are unique or sought after will all be taken into account. Typically, home improvements increase the value of the home. Both internal and external renovations,  including upgrades to the garage or installations in the yard, are considered by the appraiser.

Finally, the appraiser will consider other properties: typically ones in the same ZIP code that are comparable to the house being assessed in size, age and other features. This provides a general sense of the market for a home with similar qualities. These comps provide context, establishing a range of property values for the home.

How long does an appraisal take?

Appraisals can take up to several weeks to complete, though not necessarily because of the time it takes to perform a single, on-site appraisal of the home. That visit typically takes up to an hour, at most.

Instead, much of the time is dictated by the schedule of the appraiser. You may need to wait several days for the appraiser to come visit your property. Then it is a matter of the appraiser’s schedule to look at comps.

An appraisal can take as little as a couple days if an appraiser isn’t busy, but typically expect it will take a couple of weeks to get the finalized appraisal report.

How much does an appraisal cost?

According to data collected by HomeAdvisor, a typical single-family home appraisal costs anywhere from $313 to $42, with the average being about $350. Typically, the buyer will pay the cost of an appraisal (especially since it’s their mortgage lender who’s requiring it). But that can be negotiated.

Appraisal tips for buyers, sellers and refinancings

The appraised price of the home can affect everything from the sale price to the mortgage size to the interest rate while refinancing. For this reason, it is important for buyers not to get out over their skis and make an offer that is way over a home’s list price. Typically, lenders won’t finance more than 80 percent of the home’s appraised value.

This can lead to an appraisal gap, which can leave the buyer in a position of needing to make a bigger down payment — in effect, paying the difference between the sale price and the appraisal price in order to get the loan and actually get the house. (Some buyers put an appraisal contingency in the purchase contract that allows the sale to stop if the difference is too large.) Looking at similar homes or working with a real estate agent to perform a competitive market analysis can help avoid creating an appraisal gap.

For sellers, it is important to make sure the appraisal accurately reflects the value of a home. Inform the appraiser about offers received on the house to help indicate market demand, and attend the appraisal to provide insight to the appraiser about any renovations or upgrades that may increase the property value.

Likewise, if you are refinancing, it is worth pointing out upgrades that have been made to the property to help show its true value. It’s also worth fixing any visible cosmetic issues to the home before an appraisal to help accurately reflect its value.

Appraisals vs. other home valuation models

Appraisals are the most commonly used home valuation method for determining the fair market value of a property, but they are not the only option available. Automated valuation models (AVMs) can provide an algorithmic assessment of the value of your home using comparable properties. These are more efficient than an appraisal, as it can be performed almost instantaneously.

However, they do not take into consideration the condition of the property in the same way an appraiser does. Nor can they necessarily provide the same insight into a local market that an appraiser can.

Next steps in home appraisals

A home appraisal allows the buyer and seller or refinancers to understand the fair market value of their property. If there are any issues, such as a significant gap in the sale price for the home and the appraised value, they may have to figure out how to bridge the gap — the seller  lowering the sales price, the buyer putting more cash down — to keep the transaction on track. If it is in line with expectations, then the transaction can move forward to the mortgage underwriting process — and, hopefully, a successful closing.

Written by
AJ Dellinger
Contributing writer
AJ Dellinger is a contributing writer for Bankrate. AJ writes about auto loans and real estate.
Edited by
Senior homeownership editor