Appraisals - What To Expect!
If you are buying a home and getting a loan, your lender will most likely require an appraisal to be done on the home you are purchasing. And your contract will have a section that deals with the appraisal. And, if you are selling that home, you should probably be expecting an appraiser to come to your home at some point before closing.
So What Is An Appraisal?
An appraisal is used by the lender to determine the fair market value of the home you are buying! In this market where homes are being bid up crazy amounts, the lender is going to lend you money based on the value of the home you are buying - which is either the purchase price or the appraised value, WHICHEVER IS LOWER!!! There are regulations and guidelines that appraisers must follow - and the guidelines can vary a little bit by the type of loan you are getting - Fannie Mae and Freddie Mac are the conventional loans, but if you are getting a VA/FHA/USDA/VHDA loan, these are government backed loans and there are additional safety and condition things that the appraiser will look at to ensure that the house will be safe for the buyer.
Who Is The Appraiser?
The appraiser is hired by the lender (the buyer and seller and their agents have no control over who the appraiser is that gets hired). They have to be licensed in Virginia and have to go through a lot of education and continuing ed to keep up their licensing requirements. They are a neutral third party - I always like to say that they have no vested interest in whether or not the home closes - their job is to make sure that they give an objective valuation of the property you are buying and the lender is making a loan on.
When Is The Appraisal Done?
The appraisal is usually one of the last things done before closing. The contract gives the lender a 15 day window in which to order the appraisal. Once the order is accepted by the appraiser, they generally will have about 7 to 10 days to go to the house and appraise it and send it to the lender, who will review it and then forward to you. In this market, I have had buyers who are asking their lenders to go in and order the appraisal within 1 business day of contract ratification as a way to get the appraisal contingency out of the way!
How Long Does The Appraisal Take And What Is The Process?
When the appraiser goes out to the house they normally will spend maybe 30 minutes to a hour or so (depending on the house) at the house. The appraiser will measure the house in order to determine the actual SF of it (the tax records may have an incorrect SF noted so appraisers will actually measure the house). They will then come into the house and walk through it to get a feel for the layout. They will note any improvements and upgrades the seller may have done to the house. They will also draw a floor plan of the house and take measurements. Finally, they will take pictures of the rooms, the exterior and photos of any specific issues they see. The appraiser will then pull what they consider to be comparable sales in the area and do at least a drive by of those most recent solds and pendings. They may call the agents who were involved in the sale of any comparable sold homes to get more information than they may have been able to get from MLS or the tax records. I have even had appraisers that will go to the county to make sure that any additions were done with proper permits. After the appraisal is sent to the lender, it is reviewed by the underwriter. After the underwriter reviews it, it should be sent to you.
What Things Does An Appraiser Consider On The Appraisal?
There are a number of things that an appraiser will consider when looking at the house you are buying.
The condition of the home - especially if there is anything that seems to be structurally unsound or unsafe. They will also look at the home's overall upkeep for things like leaky faucets, broken appliances, broken windows, damaged floors, etc. They ARE NOT looking at how good a housekeeper the seller is (although I recommend that the house be clean as it always leaves a good impression in the appraiser's eyes).
The location of the home - the appraiser will take into consideration the schools, crime issues in the area, proximity to hospitals/fire station/police station. They will look at whether you are on a busy street, what the surrounding homes in the neighborhood are like, if you are in a suburban/urban/rural area. You may not be able to change the location, but your home should be priced for location issues, if any.
The age of the home - an older home in a newer neighborhood may not carry the same value as the newer homes in the area. Likewise, if the home is outdated it may carry less value than another of the same age but has been updated. The appraiser will note not only the actual year built of the home, but also what is considered the effective age of the house.
The exterior of the home - if you have wood siding, the appraiser will check the condition. They will look at the structure to determine if there are any possible structural issues with the house - are there large cracks in the foundation, is the deck pulling away from the house, is the chimney pulling away from the house, how does the roof look. These all can have an impact in the value that the appraiser gives to the house.
The layout of the home - does the layout function for today's buyer? is the layout of the house consistent with neighboring houses? In our area, most appraisers will tell you that for a room to be counted as a bedroom, it needs to have a closet and you should not be able to access it by coming through another bedroom, there should be windows to allow escape in the event of an emergency. But you have homes in the City of Richmond that were built over 100 years ago that may not have a closet and you may have to go through another bedroom to get to that bedroom. It would still be a bedroom because that was how it was intended when it was built!
Any signs of water damage - this is a big one as water damage can lead to other major problems, including mold, mildew and rot. So if there is a basement, the appraiser will look at that (if it is a finished space, the appraiser may want to make sure it was waterproofed in some way since Richmond basements tend to take on moisture). The appraiser will look for water stains on ceilings and walls. They will check plumbing to see if there are any leaks.
The size of the home and lot - if the house you are buying is a 5,000 SF home on a 2 acre lot, in a neighborhood of homes that are 1,500 to 2,000 SF on quarter acre lot, your home's size and lot may be considered non conforming and the appraiser may not give value, or may give negative value, for this!
The home's interior - the appraiser is going to look at the number of bedrooms, baths, basement, attic, the materials used in the house (such as on flooring, kitchen, bath).
What Happens If The Home Doesn't Appraise?
If you have written up any offers in 2022, you most likely are having to increase the price in order to compete with the other buyers out there! So there is a stronger possibility that the house you are buying does not appraise for the purchase price. In that case you have 3 options (assuming your contract was contingent upon the house appraising for the purchase price):
Terminate the contract
Bring to closing additional money to make up the difference between the appraised value and the purchase price
Renegotiate the price with the seller
The appraisal for the home you are going to buy is an important piece of the home buying puzzle. But it can also be a bit stressful. Both buyers and sellers may have questions about the appraisal and what they can do to make sure it goes smoothly and the value for the home is good. As a full time Realtor since 1996, I have been through many appraisals (including on my own homes) and can answer a lot of questions you may have. Feel free to contact me - I am happy to help!