Whether you’re buying, selling, or refinancing your home, the home appraisal process can be filled with anxiety. So much depends on the value the appraiser assigns to your home: It can greatly impact a home’s purchase price, as well as its equity in the eyes of a mortgage lender.
Here at Covered, we don’t like letting anxiety anywhere near our customers. That’s why we recently sat down with veteran Denver-based appraiser, real estate investor, and owner of Valuate Colorado Aron Yacobucci, asking him all the questions we could think of. With nearly 20 years of appraisal experience, Yacobucci has seen the good, the bad, and the tremendously ugly. Below, we break down the basics. Anxiety, be banished!
So what is an appraisal?
Generally speaking, an appraisal is an independent, expert assessment of the fair market value of a home. For most home purchase and refinance situations, the mortgage lender will order what’s called a 1004 (ten-oh-four) appraisal.
An automated underwriting system decides which appraisal type is appropriate for each situation. Yacobucci explains the three most common lender-ordered appraisals:
- 1004 — Full appraisal inside and outside of the house. The appraisers assess square footage; the quantity and size of bedrooms, bathrooms, and kitchens; interior and exterior condition and age (including roofs, foundations, and gutters); construction quality; structural integrity; functional layouts; appliances; utilities; property site (e.g., adverse or positive site conditions, location to encroachments, easements, environmental conditions, land use); parking; and zoning, among other things. Of course, they also assess the home’s location and neighborhood.
- 2055 — Drive-by appraisal. The appraiser only looks at the home from the street. (“I don’t even set foot on your property,” says Yacobucci.) They’re checking whether the house appears to be in decent condition from the outside. The value is based on average condition for the neighborhood. This appraisal type comes into play for certain lending requirements based on the automated underwriter findings and credit scores.
- 2075 — Drive-by with no value. The appraiser takes a photo from the street, essentially verifying that the home is what and where it’s supposed to be. The appraiser does not provide a value.
Who hires the appraiser?
In most cases, your mortgage lender will hire an appraiser via an appraisal management company (AMC), which acts as a middleman between the appraiser and the lender. As Yacobucci explains, appraisers’ ultimate responsibility is to their clients, which are generally the banks you’re obtaining loans from. But that doesn’t mean you don’t get to see the appraisal. Under the Dodd-Frank Act, federal law requires your lender to send you a copy.
Who pays for a home appraisal? And how much does it cost?
In a home purchase situation, the buyer generally pays for it. In a refinance situation, the homeowners generally pay for it.
Most likely, your mortgage lender will simply add in the appraisal as another closing cost line item, or have you pay the AMC via credit card. In lending transactions backed by (GSE) government-sponsored enterprises, you won’t pay the appraiser directly, either. Instead, you’ll pay for the appraisal at the time it’s ordered, or through closing costs.
Appraisal prices are not fixed; they are determined by the local market. In high-demand markets like Denver, Portland, and Seattle that have a high volume of lending transactions, a 1004 may run as much as $550 to $750.
When buying a home, when does the appraisal happen?
Generally speaking, your appraisal will happen about halfway through the home-buying process. For example, in a 40- to 45-day closing, appraisal deadlines are often at about 15 or 20 days.
Though appraisals often take place after the home inspection, they never take place right at the end of the home-buying process. Your lender needs the appraisal to secure funding.
How does my appraiser decide how much my home is worth?
Yacobucci explains, for home purchase and refinance situations, “The most common way an appraiser will determine the value of your home is through the process of substitution. Basically, the appraiser will search for market sales that best reflect your home. These substitute sales are more commonly known as comparables, or ‘comps’ for short. So if you have a 2,000-square-foot remodeled brick ranch, the appraiser is going to look for sales of 2,000-square-foot remodeled brick ranch homes in your immediate market.”
What if there isn’t a home exactly like yours? As Yacobucci relates, in those cases, appraisers expand their searches to include the most similar properties available at the time of your appraisal. For example, one home may be a little smaller, and one may be a little larger. The appraisers make adjustments on those variances. The adjustments are based on the monetary impact of the marketability of a certain feature of your home. Yacobucci explains, “For example, a lake or mountain view — generally a positive feature — would more than likely have a positive monetary adjustment for your home. Conversely, facing a busy thoroughfare — generally a negative feature — would more than likely have a negative monetary adjustment on your home. Other adjustments may include new kitchens, baths, and other updating, as well as any deferred maintenance.”
As Yacobucci explains, however, there are other ways to do valuations: “There’s the cost approach. I might do that for a builder. How much will it cost to build this house? Or there’s the income approach. How much income can this property generate?” The income approach is common for valuations of rental or multifamily properties. Ultimately, the valuation approach depends on your objective, home type, and the client’s requirements.
How long will the appraiser be in my home?
As Yacobucci explains, while the appraisal itself may take 1 to 2 days to complete, the appraisal inspection (which takes place at your property) generally takes anywhere from 30 to 90 minutes, depending on the size and complexity of your home.
What will my appraiser DO during the appraisal?
They’ll take pictures, measurements, and notes. Exact techniques vary from appraiser to appraiser. Yacobucci explains, “Tape measures are kind of outdated. Very few appraisers use them anymore. Usually we use a laser to take measurements.” There’s also a new technology Yacobucci has begun using in which the appraiser 3D scans and maps the interior and exterior of your property using an iPhone and specialized software. While this technology is currently only being used in a few test markets, it’s expected to go mainstream in the next couple years.
Generally speaking, Yacobucci explains, he’ll start on the outside of the home, shooting photos of the exterior and noting the condition. At minimum, he takes photos and measurements of all four sides of the home, as well as any patios or other structures. Then, he goes inside, taking photos (“a minimum of four per room — one from each wall plus the ceiling and floor”) and noting the condition of every room. He also notes any updates that have been made, as well as any deficiencies or evidence of deferred maintenance.
Should I stay or should I go?
Yacobucci says he honestly doesn’t mind either way. He’s confident that most appraisers won’t mind, either. He says, “Every homeowner is different. Some stay at the property and are genuinely interested in the process. Others will just continue with their day-to-day activities, and I don’t see them until I’m about finished up.”
Whether homeowners are present typically depends on whether it’s a new purchase or a refinance situation. In purchase situations, he says, “Seven out of ten times people are not there. There’s a lockbox on the property, and they’re used to having people come through the house for showings and inspections.” For refinancing situations, however, people are often home so that they can let him in.
Yacobucci is mindful that appraisals are unfamiliar territory for many homeowners. He says, “I understand the appraisal is an invasive process. You’re letting a relative stranger into your home and they’re measuring, opening all the doors, and taking pictures of your bedrooms and bathrooms. It can be uncomfortable for some people. So I try to explain the process beforehand, so I don’t catch anyone off guard once I arrive at the property.” Yacobucci continues, “In my practice, once I’ve finished measuring and noting the room count and condition, that’s when I like to take time with the owner to go through the property and have them tell me things about the home that I may not have noticed or wouldn’t know without their insight.”
How should I prepare my home for appraisal?
First and foremost, do your best to make sure it’s clean and presented to advantage. Says Yacobucci, “While it’s completely up to homeowners how they want to present their homes, if I were advising a friend, I would say: Tidy it up if you can. Make the beds. Turn on the lights. Open all the interior doors, and open the blinds to brighten the place up. But we appraisers also understand that people are busy and sometimes just may not have the time. That’s one of the reasons personal property isn’t considered in the valuation process.”
Indeed, technically speaking, appraisers don’t value personal property or let a home’s cleanliness impact their valuation. “They are trained to think of the house as being broomed clean, as if it was emptied and swept out,” explains Yacobucci. But for those homes that haven’t seen a broom in quite a while, it definitely isn’t going to hurt to tidy them up a bit.
Should I undertake any bigger changes before the appraisal?
Only if you legitimately have the time and incentive to make those changes. In particular, Yacobucci calls out flooring, kitchens, bathrooms, and exterior maintenance as the big-ticket items that can have the biggest impact on your home’s value. These things all have an expected life cycle, and it’s clear at a glance if they’re becoming outdated and in need of replacement.
“When you reach the end of that lifecycle, you’re not going to maximize your home’s value,” explains Yacobucci. “The changes that make the biggest impact to potential buyers are going to be new floors, kitchens, and bathrooms. A lot of times, the exterior siding and maintenance can make a difference, too.”
What else makes an impact? Yacobucci says, “On the negative side, you’re going to get dinged for peeling paint or worn-down carpet.” Those types of items may be regarded as a direct reflection of how well you’ve taken care of the house. So it may be worth the effort and investment to fix that peeling paint on the front of your house, or to install new carpeting.
From an appraiser’s perspective, is it worth making other small changes to a home, like a newly painted front door? Yacobucci says, “While painting your front door is not going to raise the value of your property, a myriad of small changes — like new interior paint, new lighting, and new bath fixtures — can definitely add an overall positive appeal to the property.”
Should I prepare any documentation for the appraiser?
If you’ve done some updating and upgrading in your house, says Yacobucci, “Have a brag sheet.” List out any significant improvements you’ve made — things like “installed a new bathroom in 2015,” “installed new granite counters in 2016,” or “installed a new roof in 2017.” Hand it to the appraiser when they arrive. While the appraiser is trained to assess the quality and condition of these items regardless, it’s helpful and convenient to have it all laid out on paper.
You can also pull — or, better yet, ask your realtor to pull — comps. While your appraiser will always pull comps after seeing your property, it’s helpful to them to be able to consider a range of possibilities.
How quickly can I expect to receive the appraisal?
In purchase and refinance situations, says Yacobucci, “From start to finish, usually about a week.” Of course, it can depend on what’s going on in the housing market: A rush of sales or drop in interest rates could mean a backlog of appraisals.
Yacobucci spells out the basic timeline as follows:
- The mortgage lender contacts the AMC, and the AMC orders the appraisal.
- The appraiser schedules the appraisal inspection with the homeowner.
- Once the inspection is complete, the appraiser delivers the report to the AMC within 48 to 72 hours from the time of his inspection. At that point, the appraisal is in the hands of the AMC.
- The AMC reviews the report. Once it passes the AMC review, it proceeds to the lender.
- At the lender, the appraisal goes through additional review, collateral underwriting by Fannie Mae, and a manual underwriting processes. That may take another couple of days.
- Finally, your lender sends you the finalized appraisal.
What happens if I don’t agree with the home’s appraised value?
With conventional loans, you can ask for what’s called an ROV, or a “reconsideration of value.” That entails explaining what you think the appraiser missed (e.g., square footage, updates). It could also involve providing different comparables and asking the appraiser why they did or didn’t use a specific comp.
Yacobucci is sympathetic. He says, “It can be quite difficult for a homeowner to have the value come in below what they were expecting. And all borrowers are entitled to a competent, unbiased valuation of their property.” So what should you do if you’re facing that unexpectedly low valuation? Advises Yacobucci:
- Make sure you’ve read the full report. He says, “If you don’t agree with the appraised value of the property, the first thing you should do is read the appraisal report thoroughly. You want to understand how the appraiser came to that valuation. There is a lot of additional verbiage the appraiser writes in addenda that are often overlooked by the borrower. These addenda may help give the borrower insight as to why certain sales were chosen over others, and why certain adjustments were applied.”
- Talk to your loan officer about any errors. Says Yacobucci, “After reading the report, if you do see an error, contact your loan officer. They will send in a request to have the appraiser address it. If you feel that some of the comps don’t apply or that others should have been used, same thing: Contact your loan officer and request consideration for alternative comparables that you’ve provided.”
Do note that, for Federal Housing Administration (FHA) loans, you’re stuck with the appraiser’s valuation for at least 120 days.
What if I have a question you haven’t answered here?
Talk to your mortgage lender or real estate agent. They have extensive experience with appraisals, and can likely help you answer any other appraisal-related questions that are causing you anxiety.