While many home buyers and sellers are familiar with the home inspection that occurs at the beginning of the contract period, they may be less familiar with another inspection that can have an even greater impact on the home sale: the appraisal. The home appraisal looks at the property, both individually and within the context of its market, to determine whether it is being sold at fair market value.

What is the purpose of the appraisal?

Essentially, the home being purchased serves as collateral for the mortgage loan. Therefore, the lender needs to make sure that the home—and money they are lending to the buyer—are worth the price being paid. An appraisal offers the opportunity for the lender to determine the value and condition of the property as well as to analyze the fair market value based on comparable properties in the area.

In some cases, the condition of the property is about more than dollars and cents. In the case of low equity loans like an FHA or VA loan, the lender wants to make sure the property is not only worth the loan amount but also that it is in good overall condition; this ensures that the homeowner will not be bogged down with excessive repair costs resulting in an inability to pay the mortgage.

You’ll also see an appraisal as part of a home refinancing process. This helps the lender to determine the current fair market value of the property so that they can be sure the amount they are lending is appropriate.

How is an appraiser chosen?

An appraiser  must be licensed and certified in the state in which he or she is practicing and have completed thousands of hours of classroom instruction. He or she is also required to have completed hundreds of appraisals under the supervision of a licensed appraiser in order to qualify.

How does the appraiser evaluate the property?

The appraiser will start by looking at the market where the property is located. He or she will conduct a search for comparable properties that have sold in the previous six to twelve months. Following this, there will be a site visit where the appraiser evaluates both the inside and outside of the property to determine the home’s current condition and prospective market value.

The appraiser will not only be looking for positive aspects of the property, but also for needed repairs that might detract from the property’s value. Before an appraisal, it’s a good idea to deep clean the space and complete any needed repairs in order to present the property at its best—just as you would before an open house or home showing.

Is the listing agent allowed to attend the appraisal?

Yes, the listing agent may attend the appraisal and be available to answer questions and provide information about the home’s condition and updates made. The listing agent may also provide additional comps that support the home’s valuation.

Having the listing agent in attendance may be especially wise in the event of recent fluctuations in home values or unusually low sale prices for comparable properties. This may also be advisable in the case of a home that is unusual for its market or has features that the appraiser may not have taken into consideration.

What do I do in the event of a low appraisal?

Sometimes an appraisal comes in low, disrupting the escrow period and resulting in a renegotiation. A low appraisal affects each party in the transaction in different ways.

Buyer

For the buyer, a low appraisal may complicate mortgage underwriting and approval, leading to a new round of negotiations over price or an accommodation. The buyer has the following options when responding to a low appraisal:

• Renegotiate the purchase price to align with the appraised value in order to move forward with the financing process.
• Renegotiate the purchase price and “split the difference” with the seller in order to move forward with the financing process.
• Add additional cash to the down payment in order to reduce the amount borrowed to align with the appraised value.
• Exercise their rights under the appraisal contingency and resume their home search with another property.

Seller

For the seller, a low appraisal may mean receiving less for the home than expected and negotiated. The seller must either renegotiate the purchase price or risk losing the sale in the event the buyer walks away from the property purchase.

Can I challenge the appraiser’s price?

Both the seller or buyer may challenge or appeal the appraiser’s evaluation. However, it is best to have a basis for the challenge and to provide additional information to mitigate or correct the appraisal. Here are some items to consider:

• If it is clear that the appraiser used outdated or inappropriate comparable properties to determine market value, providing more accurate information might be a good way to argue for a higher appraisal.
• If the seller has completed upgrades that were not taken into consideration, providing documentation of these could potentially improve the appraisal report and home valuation.
• Don’t forget to check square footage and other basic information on the appraisal report—an error here would provide a strong basis for an appeal and reappraisal.

Whether you are buying or selling, it’s important to understand the appraisal process and how it may impact your transaction. If you are a seller, talk with your trusted real estate professional to find out how to prepare your home for the best possible outcome from your appraisal. If you are a buyer, ask your agent or broker about the property’s comps and how you should respond in the event of a low appraisal.