The appraisal of a home can be a bit frightening. After buyer and seller have agreed on a price and signed a contract, a mortgage lender will send an independent professional to verify that the price is “reasonable” and fair.
The appraisal process begins with a licensed appraiser making a thorough inspection of the home, its dimensions, and its fixtures. Aside from measuring square footage and counting rooms, the appraiser also looks for structural integrity and home quality.
He ignores the dirty dishes that may be in the sink, or the unmade bed — they have no bearing on a home’s value.
After inspecting the home, the appraiser uses databases to find the prices at which similar homes have sold in the immediate area.
For example, if comparing to a 3-bedroom, 2.1-bathroom home, the appraiser will look for other 3-bedroom, 2.1-bathroom homes to compare against. Once identified, the “comps” are adjusted for features. A finished basement may add $10,000 of value; a new roof may add $10,000; a detached garage may decrease a home’s value by $15,000.
The process is called “gridding” and it’s all up to the opinion of the appraiser. This is also the step that determines how good the appraisal is.
A poor choice of comparable properties, or out-of-the-ordinary gridding adjustments will doom an appraisal in the eyes of a mortgage lender. The lender, of course, has its own in-house appraisal department that performs a quality review on most appraisals that come through the door.
If your home’s appraiser uses bad comps, ignores a recent sale that should be a comp, or doesn’t account for the local market conditions, the home appraisal will get flagged.
Aside from introducing time delays — the appraised value of the home may be cut to something less than the purchase price.
Regardless if you are buyer or seller, this is an unwelcome event. As a buyer, an appraisal may reveal that you paid more for a home than what other similar homes have sold for. As a seller, your buyer may walk away from the deal because they feel “cheated”.
The best way to avoid appraisal issues is to price your home appropriately at the start and use your real estate agent’s help in determining fair market value.