You’ve found a house for your buyer or a buyer for the home you’re selling. The negotiations were successful, and a deal has been reached. A home inspection hasn’t yielded any problems, so nothing is standing in the way of closing, right? Not necessarily. One of the final hurdles to clear is the appraisal, and it has the power to leave a deal dead in the water.
What is a real estate appraisal?
A real estate appraisal is the assessment of a property’s value. A licensed appraiser conducts the evaluation and considers the condition of the property, the location and sales of comparable properties (comps) in the area.
Appraisals are required for homes financed with any type of mortgage. This includes foreclosed properties, flipped properties, distressed properties, commercial properties and industrial properties.
Why are appraisals important?
Getting approved for a mortgage depends largely on the outcome of an appraisal. Mortgage lenders want to make sure the property is worth the sale price. An appraisal ensures that the loan being offered matches the property’s value. If it doesn’t, it’s one of many reasons a home sale could fall through. However, there are several other reasons appraisals are important.
Appraisals make for realistic pricing
You may want to encourage clients who are selling their homes to get an appraisal before they list their home. This will help you set a realistic price and manage your sellers’ expectations.
Appraisals guide negotiations
An appraisal can guide negotiations if it comes back higher or lower than the sale price. For appraisals that are low, a seller may want to get a second appraisal. If the second appraisal comes back higher, buyers and sellers may feel more comfortable meeting in the middle.
Appraisals protect buyers and sellers
Buying and selling a home is a financial transaction that involves large sums of money. Appraisals protect both parties by preventing them from making a deal that’s not financially sound.
How the appraisal process works
Sellers may get an appraisal before listing their property, but for the most part, the buyer initiates this process. The client can find their own appraiser, or real estate agents can recommend appraisers they have worked with before.
The appraiser inspects the property
An appraiser visits the property and conducts a visual inspection of the home’s condition. Inspecting the interior of the home is a priority in an accurate appraisal, as doing so verifies any renovations completed within the home.
However, the appraiser can still get a good idea of a home’s value if they’re unable to get inside. The outside of a home tells the tale of maintenance or neglect. Hanging gutters, missing shutters or an unkempt lawn can negatively affect an appraisal.
On the other hand, carefully manicured landscaping, a brightly painted front door and a tidy exterior all influence an appraiser’s estimation. It’s important to have your clients ensure their home is in good shape inside and out to help boost its appraisal value.
The appraiser analyzes the local market
A comparative market analysis is a critical part of the appraisal process. It’s important to take stock of what houses in the area are listed at and their final sales price. This is a snapshot of a home’s true value — not what the homeowner thinks it’s worth but what it would likely sell for on the market.
Although you’ll likely provide these to your clients who are buying or selling a home, the appraiser will also pull comps to add to their data.
The appraiser makes a report
Appraisers compile their data from the visual inspection and the comps into a formal document. At this point, an estimated market value is generated. The report is submitted to the lender, the buyer and the seller — when requested.
The lender reviews the appraisal
Now, the crucial work begins. The lender reviews the appraisal to decide if the appraiser’s analysis supports the requested loan amount. This may take a week or more and can be a nail-biting wait to see if it’s approved.
How a real estate agent can help
You’ve already provided pricing support and completed a comparative market analysis for your clients, but there’s still work to be done during the appraisal process. Some non-disclosure states don’t allow home sales price data to be available to the public, so your client will need you even more.
Get clients ready
For sellers, emphasize the importance of staging, tidy landscaping and general cleaning when the appraiser is visiting. These things don’t technically influence an appraisal, but an appraiser may be influenced by the evident care for the home.
Buyers need to understand the importance of the appraisal process and how it can affect their ability to get a mortgage. Educating your client is part of how you earn your commission.
Provide accurate comps
Appraisers can pull comps, but if you have more insight into the area, it can be helpful to provide them with your own. You might have found a property the appraiser missed that should be taken into consideration.
Manage buyer or seller expectations
Prepare your client for all possible outcomes. This includes if an appraisal comes in higher or lower than expected. Sellers should be aware that even if an appraisal is significantly higher, they cannot increase the price.
Review the finished appraisal
Appraisers are humans, and they sometimes make simple mathematical or clerical errors. Review the final appraisal to ensure everything is accurate and no data points are missing.
Strategies for dealing with a low appraisal
A low appraisal doesn’t mean the end of your client’s American dream. There are a number of strategies to help keep the sale moving forward.
- Open negotiations: Sellers may be willing to lower the price to align with the appraisal.
- Challenge the appraisal: This is an option, especially if you notice errors or inconsistencies in the report.
- Get a second appraisal: This is an added home-buying expense, but a second appraisal may come back higher.
- Increase the down payment: Sometimes, a buyer can increase the down payment to make up for the gap between the sales price and the appraisal.
Luke Babich is co-founder and CEO of Clever Real Estate.