What is a Home Appraisal? How Home Appraisals Work in Real Estate

What Is a Home Appraisal?

If you’re thinking about selling or buying a property, it’s critical to understand the importance of a home appraisal and what role it has in your transaction. These valuations play a critical role in determining your home’s value and also serve to help you secure financing from a lender. In the worst-case scenario, a home appraisal may also stop mortgage lenders from financing a deal if the appraised value comes in below the purchase price.

Below, we explain what a home appraisal is, the different types of appraisals, and other important details that all factor into determining a home's “appraised” value. Furthermore, we discuss actions you can take to potentially help improve your home’s appraisal value and what to do in challenging situations where an appraisal didn’t go exactly how you wanted it to.

• What Does “Benchmark Prices” Mean in Real Estate?
• What Does “Months of Inventory/Supply” Mean in Real Estate?

Key Points on Home Appraisals:

• An appraisal in real estate refers to the valuation of a home to determine its worth on the local residential market.

• Home appraisals are conducted by a licensed third-party professional, who is expected to do so without bias

• Home appraisals can positively or negatively impact the sale of a home on the MLS®.

• Appraisals are an important tool for banks and other lenders to determine how much money they can securely lend to a person, helping them to avoid losses on a loan.

• A quick example of an appraisal is when a municipality sends out appraisers to determine the value of homes to evaluate how much property tax to assess to each homeowner.

What Factors Impact Your Home’s Appraised Value?

The licensed third-party professional conducting an appraisal will make an impartial estimate or opinion of the value of your home based on its features that include (but are not limited to):

• square footage
• age
• number of bedrooms
• number of bathrooms
• lot size
• renovations/improvements
• overall condition
• quality of finishings
• existence of a secondary suite
• landscaping
• unique characteristics, such as views and proximity to green spaces

Like Realtors®, appraisers also a competitive market analysis (CMA) to form the foundation of a property’s value, which compares similar properties in the area and utilizes sales data to establish fair market value.

New construction homes are typically valued higher than their older counterparts. However, exceptions do exist especially in downtown and inner city areas where land value is higher than in the suburbs. Historic communities and also neighbourhoods with unique features such as views and proximity to natural areas often command higher home appraisal values.

Luxury homes also command higher appraisals because they typically have unique features and also utilize high-end design and materials in their construction.

Why is a Home Appraisal Important?

A home appraisal plays a vital role in any real estate transaction by providing an objective and unbiased assessment of a home's value. This is essential for buyers and sellers, as it helps ensure that the sale price for any listing is fair and reasonable. It also plays a crucial role for lenders, allowing them to determine the fair market value of your property and how much money they will lend you.

For mortgage lenders, your home acts as collateral for your loan in case you cannot repay it. A low appraisal value can impact your ability to secure financing, potentially leading to renegotiations or even the cancellation of a transaction. Alternatively, a high appraisal value can increase the seller’s chances of selling the home at a higher price, making the appraisal an essential step in any real estate transaction.

What is the Appraisal Process?

Step 1 – Ordering the appraisal:

The home appraisal process typically begins after a buyer makes an offer on a home and the seller accepts that offer. At this point, the buyer’s mortgage lender or broker usually orders the home appraisal on their behalf. Although the lender arranges the appraisal, the buyer is typically responsible for covering the home appraisal cost, which, for example, can range from $300 to $600 or more.

Step 2 – Preparing for the appraisal:

Once the appraisal is ordered, the appraiser will schedule a visit to the property. During this visit, they will conduct a thorough review of both the interior and exterior of the home. This includes taking measurements, photographing key features, and noting the condition of the property.

It is absolutely critical that you prepare your home before the appraisal is conducted. Make sure to do the following tasks:

• • Clean and declutter your home
  • Repair damaged interior and exterior finishings
  • Improve your curb appeal with landscaping
  • Ensure your front and backyard are well-maintained
  • Ensure all areas of the home are accessible for the appraiser
  • Invest in high return-on-investment projects (ROI) if time allows
  • Prepare a list for the appraiser on recent renovations and improvements

Step 3 – Appraisal day:

On appraisal day, the appraiser will conduct a visual inspection of your home, evaluating your lot for all the aforementioned details such as its condition, location, features, and other relevant characteristics.

Depending on the size and features of the home, finalizing the home appraisal process can take anywhere from a few minutes to several hours. However, the inspection itself usually takes 30 minutes to an hour to complete.

Step 4 – Appraisal report:

Once the appraisal is complete, the appraiser will take all information gathered including any lists of renovations you’ve provided and get to crunching the numbers. Home appraisal reports typically include the following sections:

• • Property description
  • Neighbourhood analysis
  • Comparable sales data
  • Adjustments
  • Photos of the property

Who is Involved in the Appraisal Process?

The appraisal process involves several key parties, each playing a critical role in ensuring an accurate and fair assessment of your home’s determined value:

• Buyer: Typically responsible for paying the appraisal fee
• Seller: May choose to get a pre-listing appraisal for their own reference; the seller will provide access to their property for the appraiser.
• Lender: Orders the appraisal and uses the final report to determine the amount of funds to lend.
• Appraiser: A licensed professional who conducts the appraisal, evaluates the property, and provides the appraisal report to the lender.
• Real Estate Agent: Typically involved in coordinating the appraisal process, especially if they are representing the buyer or seller, and can provide valuable insights into the property’s market value.

Types of Home Appraisals

Whether you’re buying or selling a home, it’s essential to understand the types of appraisals and how they affect buyers and sellers differently. Also, if you’re refinancing your mortgage, a home appraisal may also affect you.

a. Home Appraisals for Buyers

When buying a home, an appraisal is a crucial step in the process that occurs after your purchase offer has been accepted by the seller. This critical evaluation helps ensure that you, as the buyer, aren't overpaying for the property. The appraisal serves as a crucial protection mechanism for both you and your lender, as most financial institutions will only provide financing up to the home's appraised value.

If the appraisal comes in at or above your offered purchase price, acquiring financing from your lender will likely proceed as planned. However, if the appraisal comes in lower than your offer price, you'll need to either renegotiate the purchase price with the seller, make up the difference in cash, or walk away from the deal if you have an appraisal contingency in your contract.

b. Home Appraisals for Sellers

For home sellers, understanding the appraisal process is crucial as it can significantly impact the successful sale of your property. While you may have already determined a listing price with your REALTOR® based on a CMA, the buyer's lender will require an official appraisal to verify the property's value before approving their mortgage.

As a seller, you can prepare for a successful appraisal by ensuring your home is well-maintained and presented in its best condition (as we discussed above). If the appraisal is lower than your agreed-upon sale price, you may need to be prepared to renegotiate with the buyer or risk them walking away from the deal. Some sellers choose to get their own pre-listing appraisal to help set an accurate listing price and identify potential issues that could affect their property’s value. However, this is optional, and the buyer's lender will still require their own independent appraisal during the purchase process.

c. Home Appraisals When Refinancing Your Mortgage

When refinancing your mortgage, an appraisal is a mandatory step required by lenders to determine your property's current market value and helps establish how much equity you have. This valuation is crucial because lenders use the appraised property value to calculate your loan-to-value ratio (LTV), directly impacting your refinancing options and the interest rates you may qualify for.

Properly preparing your home is essential to maximize your chances of a favourable appraisal during refinancing (we discussed this above). Remember that if the appraisal comes in lower than expected, it could limit your refinancing options or result in less favourable terms, as most lenders cap their refinancing at 80% of the home's appraised value. It's also worth noting that the housing market conditions in your area can significantly impact your home's appraised value, so timing your refinance during a period of strong market performance could be substantially advantageous for you.

How Much Does a Home Appraisal Cost?

The cost of a home appraisal can vary widely based on several factors, including the property’s location, size, and complexity. On average, a home appraisal can range from $300 to $650, depending on the property and provider. Typically, the buyer is responsible for paying the appraisal fee, although the cost may sometimes be split between the buyer and seller.

While the home appraisal cost is a relatively small part of the overall expense of purchasing a home, it provides invaluable information. Knowing the appraised value helps buyers make informed decisions and ensures that mortgage lenders are not overextending credit based on an inflated purchase price.

What if Your Home Appraisal is Lower Than the Purchase Price?

When a home appraisal comes in lower than expected, it can create significant challenges for everyone involved in a real estate transaction. This situation, known as a "low appraisal," often requires quick decisions and potential negotiations between parties involved to keep the deal moving forward. So, what does a “low home appraisal” mean for the different parties?

For Home Buyers:

• May need to make up the difference between the appraised value and purchase price in cash

• Can use the low appraisal as leverage to renegotiate the purchase price with the seller

• May be able to walk away from the deal if there's an appraisal contingency in the contract

• Will need to work with their lender to determine available financing options, as most lenders won't provide mortgages above the appraised value

• Might need to seek a second appraisal if they believe the first one was inaccurate

For Home Sellers:

• May need to reduce the sale price to match the appraised value

• Could lose the current buyer if a compromise can't be reached

• Might need to put the home back on the market if the deal falls through

• Should consider gathering evidence of comparable sales to dispute the appraisal if it seems inaccurate

• May want to consider making improvements to increase the home's value before requesting a new appraisal

For Homeowners Refinancing:

• May not be able to access as much equity as anticipated

• Could face higher interest rates or less favourable loan terms

• Might need to wait and reapply when market conditions improve

• Should consider making home improvements before trying again

• May want to explore different lenders who might offer different terms or appraisal requirements

The key to handling a low appraisal is to remain flexible and understand that multiple solutions are usually available. Working with experienced real estate professionals can help you navigate these challenges and find the best path forward for your situation.

More Home Buyer & Seller Resources

• Calgary Home Sellers’ Guide
• Calgary Home Buyers’ Guide

Home Appraisals Are a Must!

Whether you’re buying or selling a home, the importance of an appraisal cannot be overstated. It is a critical part of any real estate transaction, and we suggest even home sellers should conduct their own appraisal to fully understand the value of their property before listing it on the MLS®.

If you have any further questions about real estate appraisals or would like a referral to a provider, please contact our team of professional Realtors® anytime and we will be happy to help. We look forward to connecting with you to discuss your real estate goals!