When buying a home, one of the terms you will come across is an “appraisal.” This may be presented in a negative manner, but it's actually an integral part of the home buying process and one you need to understand.
An appraisal is performed by a specialist professional, and is designed to establish what the house you are buying is actually worth to a level of detail and accuracy that will satisfy a lender. Appraisers have to complete licensing coursework to be licensed in their state, and they have to have no connection to anyone involved - either the buyer or the seller.
A CMA (Competitive Market Analysis) is not an appraisal. Your real estate agent may run a CMA on the house you're considering to estimate its value and help you determine what to offer for the house. CMAs are much simpler and are not as accurate.
A home inspection is also not the same thing as an appraisal. A home inspector doesn't care how much the home is worth so much as how much work it needs to improve it (or in some cases make it habitable).
Finally, appraised value is not the same as assessed value (what the government says your house is worth) or market value (what you are actually paying). The three figures should be close together, but they are not always the same. However, an appraisal can help you dispute inaccurate property tax assessments and win.
Who pays for the appraisal?
Ultimately, you do. Typically up front and you'll have to find a quality appraisal.
Thankfully we have you covered there.
Sometimes lenders ask the buyer to pay an appraisal fee at application or closing fees, but you are able to order one separately as any lender-affiliated appraiser may not always have the correct motivations.
What if the appraisal is too low?
A lender will generally not give you more than the appraised value. This can sometimes be thousands of dollars lower than what you agreed on with the seller. The seller may not be willing to drop the price further. This can end up with you having to start all the way over, sometimes having paid an appraisal fee. To avoid this, make sure you use local appraisers who are familiar with the market. Also, make sure that the appraiser has some kind of professional designation, such as the ones from the Appraisal Institute. If you contact an appraiser through our network we do regular licensing confirmations and online background checks so you don't have to.
Finally, try to be there for the appraisal walk-through. Your lender can't talk to the appraiser, but you can. However, not all appraisers are happy having the buyer present, and they will coordinate with the seller. The seller might also talk to the appraiser - it is also in their interest to not have an appraisal that is too low.
What happens during an appraisal?
First of all, there are two kinds of appraisal. There is the sales comparison approach, which compares the home to other homes. There is also the cost approach, which accounts for the replacement cost of the home. Builders often use this type of appraisal to set their prices. For all but new homes, sales comparison is the best approach.
The appraiser will do a walk-through of the home, and look at its features. They will take into account everything from the age of the carpets to the angle of the driveway. They will compare the house to other properties for sale, and may also look at those properties to do a more detailed comparison. They will also do some of the same things realtors do when setting prices, such as looking at the market data for the local area.
When they are done, the appraiser will provide a report to the lender which lists the appraised price, and all of the things which add and remove value. It is rare for buyer or seller to get a copy of this report.
Appraisals are essential, no lender is going to give you a loan without one. You should budget to pay a few hundred dollars for the appraisal. As you are the one paying, you have a bit of leverage on which appraiser is used, use it.