Home Appraisals When Buying a Home

Home appraisals are an essential part of the homebuying process, one that is required by the lender, paid for by the buyer, and important to the seller. But what is a home appraisal exactly, what does it entail, how much does it cost, and what happens if things don’t turn out quite how you anticipated they would?

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What is a Home Appraisal?

A home appraisal is an objective assessment of the value of a home. It is ordered by the lender and conducted on the house the buyer is seeking to purchase. Lenders insist on this process taking place and if you apply for a mortgage you will need to account for the cost of a home appraisal in the future.

Why Do Lenders Insist on a Home Appraisal?

If you buy a $250,000 home with a 20% down payment, the lender needs to supply $200,000 of the total cost. But what happens if the house is only worth $150,000 and you just massively overpaid? 

Foreclosures are very costly for the banks and credit unions initiating them. They lose money on legal fees, disputes, maintenance, and more, before losing another lump sum when seeking a quick sale. If the house is only worth half of what you paid and what they gave you, they’ll lose even more money during the short sale.

By conducting a home appraisal, they can guarantee that the house is worth what they’re lending you or more, thus reducing their liability.

It only makes sense. Imagine that a friend asks to borrow $1,000 so they can buy a watch. They promise to pay you $50 a month until the debt is repaid with interest, and they also offer to give you the watch if they ever miss a monthly payment. Wouldn’t you want to make sure the timepiece was actually worth the full $1,000?

How Much Does It Cost?

The cost of a home appraisal can vary depending on the house, the location, and the company or individual providing the service. Generally, you can expect to pay between $300 and $400 for this service, but that may climb to more than $600 or $700 for bigger homes.

What Does a Home Appraisal Include?

The goal of a home appraisal is to determine the value of the house and to do this the expert will look at many factors, often accounting for more aspects and more minor details that the real estate agent who set the price in the first place.

External Factors

External factors don’t simply refer to the exterior of the house. The appraiser will consider many things that are not even on the grounds. This is important, because as every real estate agent and investor knows, location is everything. 

The biggest and best-looking house will be worth nothing if it’s stuck in the middle of nowhere and will be destroyed by erosion or subsidence in a few years.

Some of the factors considered by the appraiser include: 

  • Neighborhood: Where is the house located, is it in a sought-after or up-and-coming neighborhood, how is other land in the area being used and how can this impact its future value?
  • Lot Size: How big is the lot, what will the buyer own and how far beyond the actual building will their rights extend?
  • Amenities: Is the house located a short walk from shops and attractions or is it stuck in the middle of nowhere? What sort of utilities can it access and how are these likely to impact the type of buyer interested in the property?
  • Driveway: What is the driveway made out of and how large is it? Is there enough for a car, two cars? Can it be upgraded and extended?  

Internal Factors

Now it’s time for the house to shine. The home appraiser now looks beyond the neighborhood and inside the house itself, focusing on areas such as:

  • House Size: Square footage is key to determining the value of a house as many local real estate estimates go by a price per square foot. Of course, how those feet are used is also very important, but size is considered before anything else.
  • Rooms: How many bedrooms, bathrooms, and other rooms does the house have? This is essential for determining its value as extra rooms add extra possibilities for family buyers.
  • Foundation and Structure: The foundation and structure will be considered to make sure that the house is not suffering any seriously detrimental effects that will cause it to collapse.
  • Materials: Does the house have oak floors, brand-new kitchen surfaces, and state-of-the-art facilities or is it fitted with worn laminate, chipped countertops and tired décor?

FHA Considerations

Conventional loan home appraisals are different from those performed for FHA and VA loans. In the case of the latter, home appraisals are required to include safety features. The appraiser will make sure there are smoke detectors on all floors and handrails on all staircases, as well as other minor safety details.

What Does a Home Appraisal Not Cover?

In our guide to Home Inspections, we discussed how inspectors are not there to look for pests, toxic mold or asbestos. It’s a similar story with home appraisals, as the appraiser simply doesn’t have the skillset needed to look out for these things.

However, appraisers are not there for the benefit of the seller; they’re not interested in making sure the house receives high marks. If they notice any potential issues with pests that they discovered during their appraisal, they will probably mention them. If they do, you may be required to hire an expert knowledgeable in that particular area to take a closer look.

Can’t You Do It Yourself?

A home inspection is optional. It’s your decision whether you want to pay for one or not, and that decision may provide some much-needed peace of mind, assuring you that the house is a good investment and even helping with the negotiation process. If not, you can look for many of these issues yourself during your viewings.

However, you’re not afforded the same choice when it comes to home appraisals. These are ordered by the lender, not you, and no matter how much you try to convince them, they won’t take your word for it that the house is fine and ready to go.

Even if they did, the buyer often misses many of the issues that home appraisals highlight. The buyer tends to focus on the minor details—how their TV will look in the living room, whether their sofa will fit through the door, if this would be a good room for a pool table—and in doing so, they overlook the important things.

Appraisers don’t simply walk around the house occasionally glancing at their clipboard, chewing their pencils and making the occasional “hmm” sound. They are trained to spot things that you won’t; to notice problems that could be costly now and in the future.

Whether you want to admit it or not, they are worth their fee and home appraisals are an essential part of the buying process.

Where to Find a Home Appraiser

Your real estate agent and lender may help you find a suitable home appraiser. You can also use this search function on the US Department of Housing and Urban Development website, which allows you to search by state and license to find the most suitable person near you.