A home appraisal is required when a buyer uses a lender to purchase a home. The lender does not want to loan more money than a property is worth. In case the buyer defaults on the loan, the lender wants to know they can sell the property and get their money back. The appraised value of a home can make or break a sale so it's important to understand the home appraisal process.
What is a home appraisal?
It's an unbiased estimate of market value. Although an appraisal looks at the condition of the home, it is not the same as a home inspection. The appraisal should take anywhere from 30 to 90 minutes, depending on the size of the home. The appraiser will note the condition and features of each room of the house and features of the outside of the home, including patios, driveways, outbuildings, landscape, etc. The appraiser will measure the square footage of the home, too. The results will be used to compare the home, also known as the 'subject home', to recent sales of similar homes. The results of the appraisal will be provided in a detailed report. There will be side-by-side comparisons of similar properties that have sold. The appraisal will assign a market value to the home you are buying. This is the figure that the lender will use and communicate to the homebuyer/loan applicant.
Who performs appraisals?
Home appraisers are licensed in the state where they perform their services. They undergo an extensive training period. It's important to note that the homebuyer can't pick the appraiser. It is up to the lender. They pick from a third-party company. While the appraiser is given the sales contract price, they are not allowed to communicate directly with the lender to try and 'meet the price'. An appraiser is an independent voice in the transaction. As a side note, if someone was thinking about getting their house pre-appraised before putting it on the market, then they could pick their own appraiser. I believe this is well worth the investment to a seller, especially when your house is located on the water, in higher price-points, or differs in style from the neighborhood.
Who owns the appraisal report?
In most real estate transactions, the appraisal is ordered by the lender. While the homebuyer pays for the report as part of the closing costs, the lender retains the right to use the report. The homebuyer is entitled to a copy of the report - it's usually included with all of the other closing documents - but is not entitled to use the report for any other purpose without permission from the lender.
What happens if a home 'under appraises'?
If the appraiser comes to the conclusion that the house does not at least meet the value of the agreed-upon sales price then the lender will not go forward. What happens now? The seller/seller's agent can contest the appraisal. Errors can occur, and it's not impossible to be successful with another appraiser/appraisal. But more often than not, it's resolved in one of the 3 ways below:
1.) The seller agrees to lower the sales price to the appraised value.
2.) The lender, buyer and seller agree to meet in the middle. For example, the sales price is $200,000. The appraised value is $180,000. Everyone agrees to the new sales price of $190,000, and the buyer puts down an additional $10,000 cash to make up the difference. The loan amount is unchanged.
3.) Using the example above, the buyer agrees to come up with an extra $20,000 cash and keeps the sale price at $200,000. The loan amount remains unchanged. However, this is not common since most buyers understandably feel they should not pay more then the appraised value. But if there is no other recourse, and the buyer really wants the house and has the extra cash to close, then this is the way to go.
Overpricing a home for sale is the number one reason the home will not sell or takes a long time to sell. And if it's overpriced, it will not appraise.
Zillow's 'Zestimate' and online 'estimate your home value here' tools are worthless. Only a licensed appraiser can determine your home's value.