Looking to buy your next home? After you make an offer, you’ll likely need to get a home appraisal.
For many buyers, appraisals are stressful because a low valuation can cause them to lose funding and, consequently, the home they wanted. But if you know what to expect, you can protect your offer and your money.
Here’s what you need to know about what home appraisals are, how much they cost, how long they take, and what you can do when an appraisal comes in low.
What is a home appraisal?
An appraisal is a qualified third party’s confirmation of a home’s value. The process is fairly simple. First, a licensed appraiser analyzes the interior and exterior of the home. During this visit, they assess the following:
- Square footage of the home and yard
- Number of bedrooms and bathrooms
- Additional features, such as a pool, deck, or sprinkler system
- Upgraded designs or rooms
- Condition of the home (e.g., any repairs it needs)
- Quality of the neighborhood and its amenities
Then they decide how much the home is worth by comparing it to similar properties in the market that have sold recently.
If you’re getting a mortgage loan, your lender will likely require you to get a home appraisal. Why? Because they ensures that the bank isn’t giving more money than the home is worth. After all, the home itself serves as collateral. If you can’t pay back the loan, the lender can sell it to get their money back.
How long does it take to get an appraisal back?
Once your lender hires an appraiser, the home visit usually takes place within 48 hours. The analysis of the home itself can take as little as 30 minutes to an hour, but receiving the appraisal report can take up to two to 10 days. It may take even longer if the appraiser has more work than normal or if they have to request more information.
What to expect in an appraisal report
There are certain things an appraisal report must include to comply with the Uniform Standards of Professional Appraisal Practice. They also cover any special instructions from the lender, which is usually Fannie Mae or Freddie Mac for conventional loans.
In general, an appraisal report includes:
- The purchase price in your contract
- A description of the neighborhood and the property
- A detailed analysis of at least three similar homes nearby that have sold recently
- An analysis of the property’s replacement cost
- Additional comments from the appraiser
- A document explaining the terms in the report and the analysis process
- A final value estimate for the home
How much does a home appraisal cost?
The average home appraisal costs $349, although most people spend between $313 and $420, according to HomeAdvisor. You might pay more if the home has a higher value, if it’s in a rural or hard-to-reach location, if you plan to use it as a rental property, or if you’re getting an FHA or VA loan.
Although the lender schedules it, the borrower pays for it. This expense is included in the closing costs, which are due on the day you close on the home.
Should you have an appraisal contingency?
When an appraisal comes in below the purchase price, it’s called an appraisal gap. If this happens during your homebuying process, your lender most likely won’t fund your loan.
An appraisal contingency allows you to safely back out of an offer in this case. Without it, backing out of the offer can cause you to lose your earnest money.
That’s why many people prefer to include this contingency in their bid. But in a hot seller’s market, the more contingencies you have, the harder it is to win a bidding war. A seller doesn’t want to risk losing precious time and money because of a low appraisal.
It’s no wonder that more people are choosing to waive the appraisal contingency. For example, between September 2020 and February 2021, around 18% of winning offers waived the appraisal contingency. That’s a 6% increase from the year before.
How to handle a low home appraisal
Let’s say an appraisal comes in low on a home you’re trying to buy. What do you do? In this case, you have several options.
1. Ask for a second opinion.
You can file a request with your lender to hire another certified appraiser. Or you can make the case yourself for why the value should be higher.
2. Re-negotiate the price with the seller.
This tactic is more likely to work in a buyer’s market or when the seller is eager to close the sale as quickly as possible. In a seller’s market, though, it’s unlikely they will lower the price.
3. Pay the difference yourself.
For example, if you agree to buy a home for $350,000, but it's valued at $340,000, you would have to pay an extra $10,000 in cash at closing. Of course, the bigger the appraisal gap, the harder this strategy is.
4. Make an offer that’s competitive with cash.
A cash offer is the most competitive way to ensure you will get the home you want.
Now that you know how to protect your offer from a low appraisal, you’re ready to find your next home and make a competitive offer! Knock takes pride in helping homebuyers buy a new home before selling their old one. Learn more about our Knock Bridge Loan™ solution.
by Jenny Rose Spaudo