December 20, 2023
What to expect, when to negotiate, and how to deal when things don’t go your way.
Most people have deeply personal reasons for wanting to buy a home. Maybe it’s the bathroom that feels like a dreamy, modern spa. Or that two-tiered deck just made for parties.
Your lender doesn’t care about the freestanding tub. Or the built-in outdoor fire pit. Their only concern is that the house you buy is worth as much as the value of your mortgage.
To them, a house isn’t a home. It’s collateral. (Harsh, but true.) If someday, for some reason, you can’t make your mortgage payments, the lender can foreclose on the home and sell it to recoup all or some of its costs. (Even harsher, but also true.)
For that reason, a home must be valued at, or above, the agreed-upon purchase price, and this has to happen before you can close on a house. That’s where a home appraiser comes in.
After you sign a home purchase agreement (the contract between you and the seller about the terms of the pending sale), and before your lender approves your loan, the home you’re buying must pass an appraisal. That’s an assessment of the property’s value by an unbiased third party: the appraiser.
An appraiser is a state-licensed or -certified professional. Their job is to assess an opinion of value — how much a house is worth. The appraiser is not on anyone’s side. They don’t represent you or the seller; instead, this person is a contractor chosen by your lender through an appraisal management company — a separate, neutral entity that maintains a roster of appraisers.
Appraisers survey a house in person, using five main criteria to determine the value of a home:
Generally speaking, the home buyer is responsible for paying for the appraisal, and the fee is typically wrapped into your closing costs. However, the party who pays for the appraisal is negotiable. It never hurts to see if the seller is willing to cover it.
How much money are we talking about? The average professional home appraisal will run between $330 and $440. Costs can vary depending on the square footage and quirks of the house, with higher appraisal prices for larger or more unusual homes.
Typically, a purchase agreement has a “home appraisal contingency” requiring the appraisal to be completed within 14 days of the sales contract being signed. Because it takes appraisers some time to visit your house and write a report — up to a week, or longer in a busy housing market — your lender will order the appraisal immediately after you sign the purchase agreement.
When the appraisal is finished, the appraiser issues a written report with their opinion of the value of the home. To produce the report, they use their analysis of the property and data from comparable homes, as well as review the purchase offer. The report will outline their methodology and also include photographs they’ve taken of the property, inside and out.
You and your lender will both receive a copy of the report. Three things could happen next:
Don’t despair — not yet. If you’re faced with a low appraisal, there are several ways the deal can still go through.
Before we talk strategy, here are some reasons why appraisals come in lower than expected:
If the appraisal comes in low, your agent will offer recommendations about how to proceed. In general, your best strategy is to persuade the seller to lower the sales price or to split the difference between the home’s appraised value and the price with you. This is when you can rely on your agent — and their negotiating skills — to go to bat for you.
You can also appeal the appraisal assessment. You’ll work with your agent to research comparable homes that support the sales price you agreed upon with the seller and present this information to your lender, who will forward it to the appraiser for a re-evaluation of the home’s value. Ultimately, though, it’s up to the appraiser to decide whether to revise their valuation of the property.
Alternately, you can ask your lender for a second appraisal, though there are caveats:
The last option: You can come up with the cash to cover the difference between the home’s price and the appraised value.
If you don’t want to take that route (and who could blame you?), a purchase agreement’s home appraisal contingency allows you to walk away from the deal scot-free, and with your earnest money deposit in hand.
But today, let’s assume it all works out. With the appraisal behind you, you’ll be one step closer to closing on that house.