Answering Your Appraisal Questions

Question: Can you explain the basics of the appraisal process?

Answer: I sat down with one of the best local lenders, Jake Ryon at First Home Mortgage (Jryon@firsthome.com), and came up with a list of some of the most common questions we hear about appraisals, which I’ll answer below:

What is an appraisal?

An appraisal is an objective assessment of a property’s value, conducted by an unbiased third party who does not have a stake in the sale of the property.

Below is an example of the core component of a recent appraisal in Arlington, the Comparable Sales Analysis. It compares objective features of the subject property (the home being assessed by the Appraiser) to the same features of similar/comparable homes that have sold nearby to reach a valuation of the subject home based on the Appraiser’s determination of how the difference in features change the value of the homes.

Why are appraisals done?

In most cases, the bank/lender is the primary investor in a home purchase. If you put 20% down, the bank is investing the other 80%. Appraisals are done to ensure that banks are making responsible investments in homes they otherwise know very little about and to make sure they do not lose substantially if you, the borrower, default on the loan and the bank is forced to take over (and sell it).

In short, the bank conducts an appraisal to make sure they agree with the value (aka the agreed upon sale price) you’ve placed on the home.

Who does the appraisal?

Anybody can hire a licensed appraisal to provide an opinion on a property’s value, but most appraisals are done through a bank/lender. Lenders have a pool of independent, licensed appraisers or appraisal companies that receive a notice when an appraisal is needed for a loan and an appraiser from the lender’s pool claims the job.

The selection of the appraiser is designed to be a blind selection process to maintain independence and objectivity so that lenders can’t handpick the appraiser they want and potentially influence the results.

Is an appraisal required? What is an “appraisal wavier”?

Most lenders require an appraisal to approve a loan, but in some cases an “appraisal waiver” is issued if Fannie Mae/Freddie Mac determine that that they do not need the additional assessment of an Appraiser because the sale price falls within an acceptable range based on sales history and reliability of comparable sales.

Waivers may also be given if the borrower has a high enough down payment that enough of the risk of overpaying for a property is being absorbed by the buyer.

How long does an appraisal usually take?

When Appraisers are not overwhelmed with orders and a lender submits a rush order right away, I’ve seen appraisals completed in as little as a few days. However, in most cases, appraisal reports are usually completed within 1-2 weeks of the order being placed by the lender.

What effect does a low or high appraisal have on a property sale?

If the appraisal value comes in at or above the purchase price, the bank is happy and the loan proceeds along the approval process. If the appraisal value is below the sale price, the bank will require the sale price to be reduced to the appraisal value or that the buyer put more money down to satisfy the loan-to-value ratio.

In most cases, the amount of additional money a buyer needs to put down is equal to the percentage the bank is contributing to the purchase (e.g. 80% if you’re making a 20% down payment or 95% if you’re making a 5% down payment) multiplied by the difference between the contract’s sale price and the appraisal value. However, this additional contribution can vary or may not be needed depending on your down payment amount, type of loan, and other details of your loan arrangement.

What happens if we disagree with the value or it comes in low?

The borrower/buyer is the only party who can challenge an appraisal and they must provide other (better) comparable sales, facts, or justifications to support an adjusted valuation.

I have dealt with some frustrating scenarios as a listing/seller’s agent when an appraisal came in low based on factually incorrect information on the appraisal report (incorrect bedroom count, square footage, etc) and there is nothing that can be done unless the borrower/buyer requests a revision.

What is an appraisal contingency?

An appraisal contingency is one of the three “standard” contingencies in the residential real estate contract (inspection, financing, and appraisal are the “big three”). It protects the buyer in the event a property appraises for less than the sale price by giving the buyer the ability to renegotiate the sale price or void the contract without losing their deposit.

Who pays for the appraisal and how much does it cost?

Buyers pay for the appraisal as a pre-closing expense and the cost usually ranges from $500-$1,000 depending on the type of loan and value/complexity of the property.

Does appraisal value equal market value?

I would argue that the answer is no. Market value is the price a buyer and seller are willing to exchange a property for and often incorporates forward-looking expectations (future construction, development pipeline, market trends, etc).

The appraisal value is generally backward-looking given that Appraisers are tasked with determining a home’s value based on similar properties that have sold/closed nearby (generally within 6-12 months). There is subjectivity in which comparable sales an Appraiser chooses for the report and how they value different features, like a pool, view, or extra garage space.

Oftentimes I find that things the market values like beautiful finishes/design, a quiet neighborhood street lined with mature trees, or lot quality (privacy, flat yard, etc) are not valued by Appraisers to the same extend as they are buyers. Appraisers are generally focused on objective, measurable criteria like bedrooms/bathroom count, square footage, parking, lot size, etc.

It is worth noting here that Appraisers do know the contract sale price of the property they’re appraising in real-world appraisals for lenders (as opposed to my hypothetical scenario above).

Does appraisal value impact my property tax assessment?

No, the appraisal value has no impact on anything outside of the loan. The County will not receive the appraisal value to include in their assessment for tax purposes.

Can I switch lenders and use the same appraisal?

For Conventional loans (the majority of loans in Arlington), most lenders will not accept an appraisal done through another lender, but VA and FHA appraisals do have reciprocity on appraisals between lenders.

If you have additional questions about appraisals, you can email me at Eli@EliResidential.com or a great local lender, Jake Ryon of First Home Mortgage at Jryon@firsthome.com.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Are Appraisal Values Keeping Up With Sale Prices?

Question: Given the recent appreciate in real estate values, are you seeing more homes appraise for less than the sale price?

Answer: As we saw in last week’s column, the Arlington real estate market has appreciated rapidly over the last six months which increases the chances that an Appraiser cannot find past sales to support the price the buyer and seller have agreed to, thus increasing the amount of low appraisals in Arlington over the last six months (unfortunately there’s no data to back that up so it’s based on what I’ve seen and heard in the market). Generally, appraisal values lag behind actual market appreciation by a few months.

Banks Often Require Appraisals

If a buyer is getting a mortgage, the bank almost always requires a third-party appraisal to assess the property’s market value. While one can easily make the argument that the price the buyer and seller have agreed to is the market value, banks don’t look at it that way, hence the third-party appraisal.

Appraisals are largely based on comparable home sales over the last six months. It’s a common myth that Appraisers can only use sales from the last six months, but more recent sales are given more weight than sales 6+ months ago. Ultimately, it’s the Appraisers job to determine the market value of a home using the best available information.

Impact of a Low Appraisal

If the appraised value comes in at or above the purchase price, all is good in the eyes of the bank so things continue as planned (note: a higher appraised value has no impact on your assessed value for tax purposes).

If the appraised value is lower than the purchase price, the bank usually requires you to negotiate a reduced sale price to match the appraised value or put more money down to cover the difference between the sale price and appraised value, multiplied by your loan-to-value (LTV) ratio. In some cases, you can also change the type of loan you’re using to satisfy the bank.

The easiest way to calculate LTV is subtract your down payment percentage from 100%. In other words, if you’re putting 20% down, your LTV is 80%. If there’s a $10,000 difference between the sale price and appraised value, you’ll usually be required to bring an extra $8,000 ($10,000*.8) to the table.

All of this can change depending on your loan program and down payment, so it’s important to understand the impact a low appraisal will have on your deal prior to making an offer.

Protection Through An Appraisal Contingency

The Appraisal Contingency is one of the “Big Three” contingencies that are common to sales contracts in Northern Virginia. The Home Inspection and Financing Contingencies are the other two.

The Appraisal Contingency gives buyers an out, with a full return of their Deposit, in the event the appraisal is below the sale price and the seller is unwilling to reduce the sale price or the buyer is unwilling to make up the difference or change loan products.

If you include an Appraisal Contingency in your offer, it’s a good idea to ask your lender how long it will take to order and complete the appraisal so you can structure the contingency period around that timeline. Remember, shorter contingency periods are more attractive to sellers and longer periods generally favor the buyer.

When To Waive The Appraisal Contingency

Sometimes waiving an Appraisal Contingency is the right strategic decision when making an offer. If you’re competing against other offers, especially if they’re cash (no appraisal needed), you should talk with your agent and lender about the risk and reward of giving up this protection. In some cases, sellers will choose an offer with less risk (fewer or no contingencies) instead of the highest offer, especially when the sale price is well above recent comparable sales.

Removing the Appraisal Contingency altogether isn’t your only option either. There are ways to reduce the seller’s risk exposure, thus making your offer more competitive, while also limiting your risk exposure in the event of a really low appraisal.

Disputing a Low Appraisal

If you disagree with the appraised value, ask your lender about the dispute process. First review the appraisal report to understand what sales and details the Appraiser used to determine the value. The best chance you have at getting an appraisal adjustment is to provide the Appraiser with different sales that more accurately represent the subject property’s value, with an explanation.

Managing appraisal risk/contingencies is one of many strategic decisions you’ll make as a buyer or that you’ll have to assess as a seller. Don’t hesitate to reach out to me by email at Eli@EliResidential.com if you have any additional questions!