So you've finally made an offer on your dream house and it's been accepted. Congrats. But before you pop a bottle of Champagne and start picking paint colors, there's one more hiccup you'll have to overcome — the appraisal. It's a vital step in the real estate process and while it can cause major headaches, the appraisal's in place to protect all parties involved from transactions that don't reflect what a property's really worth.
What is an appraisal?
An appraisal is a part of mortgage procedure required by a lender that brings in a certified appraiser to determine the value of a home which will, in turn, steer how much money the lender will be willing to lend (a lender won't finance a loan that's larger than the appraised value of the property). Not to be confused with a home inspection that checks for issues like plumbing code violations or air quality, an appraisal starts with a physical examination of the property and takes into account factors such as the condition and size of the home as well as any other permanent fixtures on the property, serious structural problems, and the surrounding area. (This Freddie Mac Appraisal Report form might give you a better idea of the items of note in an appraisal visit.)
An appraiser also looks to comparables, or "comps" — a handful of similar homes in the area that have recently sold — to analyze a property's market value by comparing components like square footage, age, lot size, fireplaces, pools, and other amenities. After the boom and bust market of the last decade, regulations on appraisals have gotten stricter (we'll talk in more detail on this below) and factors like foreclosures and short sales have impacted what comps are usable. Though some agents and real estate professionals feel this has negatively skewed appraisal reports, professional appraisal groups, like the Chicago-based Appraisal Institute, maintain that qualified appraisers understand how an unstable or declining market affects home values.
According to Quicken Loans' site, a typical inspection takes between 25 and 45 minutes.
Changing checks and balances
In 2009, in response to shady dealings in which big time loan institutions were accused of pressuring or working in cahoots with appraisers to inflate home values – a practice many felt was partially to blame for the market collapse -- the Federal Housing Finance Agency mandated a new system, known as the Home Valuation Code of Conduct (HVCC), meant to put space between the lender and the appraiser to prevent fraud. As a result, all appraisals must be conducted by a third party appraiser who has no interest in the outcome. An appraiser is now selected through the AMC or Appraisal Management Company or other independent appraisal group authorized by the lender.
Options when an appraisal doesn't match the price
Let's say a house is listed for $350,000. You offer $325,000 and your offer's accepted. Then comes the wrench: the appraisal comes back at $275,000. As the buyer, you're in a bind as your lender won't lend you more than that appraised value. As a seller, you're in a bind as it appears the house is worth a lot less than you're asking. In the last few years as the market's been in flux, agents, homeowners, and buyers have reported this issue interfering more and more with their nearly-done-deals. But there are things you can do:
—Most banks and lenders have a process in place to dispute an appraisal, though this can be a lengthy and not always effective path unless you can offer proof that errors were made in the appraisal process. By law, borrowers are entitled to a copy of the appraisal report at no additional cost.
—Often, the asking price can be renegotiated, with the seller dropping the price if both parties agree, or the buyer bringing more money to closing, though this isn't always an affordable option.
—There's also always the option of switching to a new lender, though that means starting the whole process over again and that takes time.
If no agreement can be reached, your transaction may very well unravel. The best remedy for avoiding unexpected appraisal woes? Being proactive. Ensure that the appraiser you'll be working with is familiar with your area (you can request another if you feel the one you've been assigned is inexperienced) and arm yourself with info on comparables nearby that may add some additional insight to the appraiser's analysis. Get an appraisal before you list your home. The Appraisal Institute has a database of qualified appraisers here. Share that prelisting appraisal with your buyer's appraiser. If the appraiser is good, he or she shouldn't be offended but happy to have another resource to tap in his or her final report.
·Appraisal Institute [Official]
·Home Valuation Code of Conduct [FHFA]
·Curbed University [Curbed Chicago]