A home appraisal serves as a step in the process of buying or selling a home that is based on an external factor: the expert opinion of an outsider. Banks use these experts to determine how much a property is worth, thus determining how much the bank would be willing to lend to a buyer. This part of the mortgage process is important. If the seller asks for $450,000 but the appraiser values the property at $375,000, then the house is seriously overvalued and the bank will not be willing to lend the full asking price. A bank does not want to keep a property that is valued less than what is invested, so the appraisal not only protects the buyer, but also the bank.
Each lender typically provides a list of licensed and properly certified appraisers that the lender primarily works with. This group of approved appraisers guarantees consistent results and changes, but the cost is up to the borrower, which is usually added to the mortgage. Appraisers have two different approaches when evaluating a property: the sales comparison approach or the cost approach.
The comparison approach compares other houses in the neighborhood (that have recently sold) with the house in question. Adjustments are made for lot size, square footage, and other specific components and features.
The cost approach is generally used for new properties and is based on the cost of reproduction. The baseline here is what the cost of building an identical house would be if the house were destroyed. This cost is taken into account with the value of the land and depreciation to determine the total value.
In a final appraisal report, the following information is usually included:
• a description of how the appraiser determined the value of the property
• a description of the house and its features and what improvements have been made
• any notes on structural issues, basement or foundation leak issues
• notes about the surrounding neighborhood (area)
• comparative market analysis to support any valuation summary
• photographs or maps showing relevant aspects of the property
So what do you do if an appraisal is lower than the home’s selling price? There may be several remedies to fix what appears to be a low-level evaluation. Certain factors, such as necessary repairs or maintenance, can affect the final attached value, so if these corrections can be made, a second appraisal can be requested. However, if the appraisal doesn’t seem like an accurate representation of the property’s value, or if the appraiser isn’t willing to compromise or listen to your concerns, you can go to your state’s licensing agency and file a complaint. If neither of these options is appropriate, the seller may be able to reduce the home’s sale price or, as a last resort, the buyer may account for the difference in appraisal and sale price by making a larger down payment.