One question we get a lot is about the appraisal purpose and process works when buying or selling a home. You should know appraisals are a normal part of purchasing and selling property when a mortgage loan is involved.

The process is pretty simple but designed to ensure the money loaned for a home purchase is equal to or greater than the agreed upon purchase price. A lender will not lend more for a property than what it is valued at by an appraiser. This protects both the buyer and the lender. Let’s dig deeper…

The first step in the appraisal purpose and process is that your lender will order it and it’s paid for by the buyer. Sometimes the cost can be rolled into the closing statement or ALTA Settlement Statement. Other times the lender requires this paid up front. You should check with your lender to see which way they do business.

Although the lender orders the appraisal and the buyer will own it, by law, the appraisal is actually completed by a 3rd party, unbiased to the transaction. This means they don’t have a stake in what the property appraises for.

The appraiser must not be affiliated with the lender or the buyer/seller to ensure it is fair.

An appraisal is an opinion of value by an authorized/licensed person. Opinions do vary but appraisers are governed by state and federal guidelines so the likelihood of large differences in value is not common.

Most appraisals are valid for a period of 120 days. The real estate market changes everyday. To be valid in the current market, generally they are considered good for about 4 months.

When purchasing a home with an FHA Loan, the case number of the appraisal is actually tied to the property and will stay with that property for 4 months. Lenders are required to use an appraisal that is tied to the property for all FHA loans during that 120 day period.

Appraiser Visits Property

The licensed appraiser visits the home to inspect size, condition, quality and function of the property. They usually verify things like a crawl space, attic and other items. They look at the neighborhood/location, as well.

Research

Armed with this information, the research starts. The appraiser will figure the replacement cost to build a similar home. This is one of the methods used to figure the homes overall value.

He/She will also research comparable homes that have recently sold in the area to come up with a value. This information tells an appraiser what other buyers have actually paid for similar homes in the local market and is an important step in the fair market valuation process. Because these are “SOLD” statistics, it represents what the “market will bear” as a sales price.

The Appraisal Report

The appraiser compiles all this information in the “Uniform Residential Appraisal Report” for the lender. You will receive a copy of this if you are the buyer.

As the seller, you are not entitled to a copy of the appraisal report unless the property appraises for less than the agreed upon sales price. In that case, a buyer will typically show the report to prove the value is less and negotiations between buyer and seller are started again.

Appraisal costs vary from lender to lender. They can run anywhere from $350 up to $800+. An average price in this area is usually between $400 and $500 but can be higher or lower. Check with your lender for the exact cost of your appraisal.

There is nothing for a buyer to do when it comes to the appraisal but to wait for the report. Again, the process is as follows:

• Make application for the mortgage loan
• Lender orders the appraisal
• Appraiser conducts the appraisal
• Appraiser creates appraisal report and submits
• Lender receives appraisal report and verifies through underwriting department
• Buyer is given the results and a copy of the appraisal

The whole process is usually a week to 10 days (VA Loans have 14 days) so it is important to get the lender everything he/she needs in order for them to order the appraisal in a timely manner and not hold up closing!

The seller will typically be told the appraisal is good if it supports the agreed upon purchase price and will not receive a copy of the report.

If the home appraisal comes in less than the agreed upon price, the seller may receive a copy of the appraisal to prove this. Then, the buyer and seller can negotiate what they are willing to do going forward.

We hope this has taken a bit of the mystery out of the appraisal purpose and process for both buyers and sellers. When you understand the processes of buying and selling homes, you are more comfortable with everything!