Demystifying home appraisals

Home appraisals are critical to the home buying and selling process. While they’re one of the best opportunities for an objective party outside the deal to assess a home’s true value, they can also torpedo an asking price or cause a lender to rescind its financing offer. But that’s not all a home appraisal can do. Let’s take a closer look at appraisals, what they mean for a sale, and how to leverage the results to get your clients the best price possible. 

What is the purpose of a home appraisal?

There are two primary reasons for home appraisals, both of which aim to ensure the rest of the sale goes smoothly. First, appraisals allow buyers to learn whether the property’s fundamentals back up their offer. However, their role in the financing process is more important for many buyers. Lenders need reassurance that they’re loaning the appropriate amount for the property, and an appraisal provides precisely this. After a purchase, a home appraisal can also be used when settling divorce disputes or contested estates. 

It’s important to share your understanding of this process with your clients. When used in conjunction with comparable sales in the area, appraisals set realistic expectations about a property’s potential value. After years of a market that favored sellers, the pendulum is slowly swinging back in favor of buyers. Compared to years past when homes sold in hours for thousands above asking, 41% of millennials expect to negotiate with sellers, 26% of whom expect to lower their prices. These days, a home appraisal is even more valuable in a changed real estate landscape.

How does the home appraisal process work?

There are three stages that agents and their clients need to be aware of.

Stage 1: Preparing for the home appraisal

First, if you represent buyers making an offer on a home, it’s vital to include an appraisal contingency in the offer. This contingency releases the buyer from their obligation to purchase the home if the appraisal is lower than the sale price. This simple contingency protects both buyer and seller while opening the door for negotiating a new price if the final appraisal is lower than expected.

Sellers should begin to gather documentation and support for a higher appraisal. This includes details of any upgrades, repairs, historical features, or other aspects of the property that might not immediately catch an appraiser’s eye.

Additionally, sellers should expect to make cosmetic upgrades to both the interior and exterior. Some home appraisers won’t even enter the front door; in this case, the home must look tidy and well cared for from the outside. This includes repairs to broken shutters, peeling paint, loose gutters, or other visible damage. While most appraisers realize appearances don’t tell the whole story of the home’s value, it is generally true that a well-maintained home appraises for more. 

Stage 2: The appraisal

Whenever possible, the real estate agent and even the homeowner should be present during the appraisal. Appraisers may have questions or need documentation they missed in their research. Homeowners or their representatives can also point out significant improvements or repairs that are not obvious.

As a realtor, being present at an appraisal means you can provide your own comps. Home appraisers do their research and often come armed with their own data, but in some cases, an appraiser unfamiliar with the area can miss similar properties within the zip code or broader community. Your presence during the appraisal means you can also answer questions about recent home sales not yet reflected in available data. 

Stage 3: Navigating the appraisal and negotiating the price

Once the home appraisal is complete, the appraiser supplies the report to the home seller, the buyer and seller, and their respective real estate agents. Look over the report carefully and discuss it with your client. Make sure it is complete and there are no errors or omissions that affect the appraised value. 

This stage is critical. Any mistakes in the appraisal that are not addressed can dramatically affect the asking price of the property and the potential buyer’s ability to obtain financing. As a representative of the seller, it is your obligation to challenge any discrepancies to get the highest value possible.

What to do if the home appraisal is low

If the appraisal comes in low despite your best efforts and additional information, there are ways to work with whatever number comes back. A low appraisal can work in the buyer’s favor; it’s an opportunity to renegotiate the price of the home. On the other hand, your seller may opt for a second opinion. This is always an option; some banks accept the average of the two prices when determining financing. 

In other cases, you may be representing a buyer negotiating with a seller who refuses to lower the price even after the appraisal comes in lower than expected. When this happens, it’s time to ask for some seller concessions. Consider requesting the seller cover repairs or closing costs to lower the buyer’s out-of-pocket costs or decrease the amount of financing needed. In some cases, sellers are happy to offer concessions, especially those that are simply deducted from the check they receive at closing.

Keep up with trends

As a real estate professional, it’s your job to stay informed. The market is dynamic, with significant shifts affecting buyers and sellers from month to month. Appraisal standards have changed, and local market trends may differ from regional or national trends. 

Invest in continuing education to best meet your clients’ needs. This might include taking appraisal courses or workshops, beefing up your negotiation skills, or taking marketing classes. You are your clients’ best advocate when it comes to representing their homes, and you need to be up to the task. 

Buyers also need you to be sharp when it comes to spotting superficial fixes hid significant issues. When you educate yourself on the entire home appraisal process, you help ensure a fair, mutually satisfactory transaction for everyone. You are the bridge between the appraisal and the sale; taking the time to understand the home appraisal process helps you better navigate this complex process and results in happy buyers and sellers.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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