To unlock the wealth in your home, chances are you’ll need to get an appraisal first. That’s true for many home equity financing options, as well as applying for zero-monthly payment terms from Point. It provides lenders, investors and mortgage companies — and you — with the necessary information to judge how much your home is worth.
If the actual appraisal process seems confusing, don’t worry. Appraisals can be broken down in a straightforward way. We’ll explain: what to expect throughout this process, guidelines appraisers abide by, and differences between online estimates and the final appraised value. Most importantly, we’ll give some tips on what to look out for, and what to do if you’re not happy with your home’s appraised value.
What is a Home Appraisal?
In the simplest of terms, a home appraisal is an assessment of a home’s fair market value, presented in an unbiased report. These reports are made from an assessment by a licensed and trained appraiser. The reason why they’re necessary is that they establish a common figure for all parties involved. That way, homeowners, lenders, sellers, and buyers are all on the same page.
State-level licensing is required and appraisers must adhere to long-standing protocols. To appraise for a federally regulated lender, an appraiser must first pass an exam by the state’s appraisal board. In some states, this is true for non-federally regulated lenders as well. These boards govern which methods are used, what is appraised, and how the ensuing report is completed.
While there are many factors that affect housing prices, appraisals are done with one of the three methods below. However, the industry standard, by far, is the sales comparison approach.
- Sales comparison approach — In this method, the appraiser uses the selling price of similar homes to determine your home’s value. Those homes are referred to as comparables or comps. Appraisers look for homes in the same area with a similar size, number of rooms, and amenities. They’ll also look at more recent sales.
- Cost approach — The appraiser will start by estimating how much it would cost to rebuild or replace your home. Then they’ll subtract accrued depreciation, which means the financial impact of wear and tear over time.
- Income approach — Income generated from the property is used to determine its value. This is more common for apartment buildings, duplexes, or investment homes which are being rented out.
Also, know that you can get a walk-through or drive-by appraisal. In both cases, the appraiser inspects the exterior of the property, but they’ll also inspect the interior in the former case. Generally, walk-throughs are considered more accurate.
Why is Zillow or Redfin Reporting a Different Value for my Home?
These companies aren’t appraisers. They operate a set of software that tries to approximate the market value of houses using publicly available information. Though this software is powerful, it doesn’t cover a lot of the nuances of the valuation process. Things such as curbside appeal, the state of recent renovations, and the general feeling it conveys to those who enter do not show up on Zillow’s radar. This leads to discrepancies between market value and Zillow’s estimate.
What Should I Look Out for During the Appraisal Process?
Renovations or additions made to a house contribute to the sum value of the house, so make sure the appraiser catches these. But don’t be surprised if they don’t generate as much value as you wished. It’s important to remember appraisals are done by comparison. If you put in new hardwood, but all your neighbors already have hardwood, an appraiser wouldn’t expect your home to be more valuable than theirs.
That said, lenders, investors, and homebuyers like well-done renovations and up-to-date appliances that preserve the house’s value. New appliances, for example, can extend a kitchen’s lifespan by an additional 20 years, and this results in a positive outcome for all parties. Just remember, modifications to the house need requisite permits and approvals to be considered.
In addition to improvements, you also want to consider damages. You should fix any issues in the house and ensure that all safety equipment works. Similarly, you will want to tidy up the yard and exterior of the house to help the appraiser fully appreciate your home’s curbside appeal. Do what you can to fix up deteriorating conditions, and avoid any negative impression.
Finally, make sure your appraiser is from the local area and familiar with your neighborhood. You can do this by asking how many years they’ve been in the industry, as well as asking which sources they incorporate into their report in addition to the MLS. To confirm they’re unbiased, you can also ask how many financial institutions they work with.
What Happens if You Don’t Like the Figure You Receive?
The first step is reviewing the appraisal. Any lender offering a loan governed by the TILA-RESPA rule is required to give you a copy of it. Pore through it carefully, and make sure that all of the details noted match the reality of the house. Sometimes simple mistakes, such as selecting the wrong number of rooms, can deal a massive blow to a house’s value.
Keep in mind, there may be nuances. For example, a common issue is basement space. It may not count as square footage the same way as above-ground space, because a prospective buyer wouldn’t find it equally appealing as another floor. However, they still can contribute to value — meaning the appraiser will still evaluate it, just differently.
If you do unearth an error in the appraisal, contact your lender and request an appeal. While it’s not easy to successfully file for one, it’s not unheard of when corroborated by a substantial amount of evidence.
There’s only one effective way to appeal an appraisal, barring a rare severe error. Find better comparables. Identify nearby homes that recently sold, with a similar number of rooms and square footage. Was there a more recent sale in the neighborhood? Did you find a home that’s valued higher with a similar floor plan? Remember, it’s all about having the evidence, or in this case, pointing out a more comparable home.
The Bottom Line
At the end of the day, you can’t unlock home equity without an appraisal. The good news? They may be valid for up to several months depending on the lender or investor. Point, for example, accepts appraisals from any time in the last four months. This means, if you’re likely to use home equity financing in the short term, that appraisal may come in handy.
Realize that it’s all about comparables. Your home value is based on the size and amenities of nearby homes that recently sold (and quite often they’ve been renovated as well). More often than not, the steps towards a good appraisal are simple, common sense measures. Communicate renovations clearly to the appraiser, and keep damages to a minimum.
Remember, even if an appraisal doesn’t return a favorable figure, you can use careful reviews of the report and updated comps to bolster your case for an appeal! The best way to an appraiser’s heart is showing them comparable homes.
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