A real estate appraisal is a report by a certified inspector that determines the value of a property based on its features and condition. Buyers compare this value to the home price to ensure there is not a large discrepancy. Appraisals are also required by lending institutions to secure loans for the purchase of property.
A real estate appraisal is one of several complicated legal documents used in the home-buying process that are often hard to understand. Fortunately, RocketLawyer can review any legal document before you sign and explain legal terms so you understand what you are signing. Use the RocketLawyer “Ask a lawyer” feature on their website to get legal advice in a matter of minutes.
How a Real Estate Appraisal Works
A home appraisal is an independent report about what a property is worth and how much the buyer should pay for it. To secure an appraisal as part of the homebuying process, the buyer or the mortgage lender researches appraisal companies, determines the best fit based on price and reviews, and hires a company. Once a seller accepts an offer letter, the buyer schedules a visit from a real estate appraiser to determine the value of the home.
To find a qualified appraiser, a buyer typically works either with the lender or with their real estate agent to determine best options. These are reviewed and vetted based on price and testimonials from prior clients. Then the appraiser is selected and conducts a full home appraisal after the seller accepts the buyer’s offer.
During the on-site appraisal of the property, the home appraiser looks for any damage and potentially costly repairs. He or she will also consider sales prices of comparably sized homes in the area to help determine the amount that the house should sell for in the current market. After considering these factors, the appraiser determines a home value that the lending institution uses as the basis for its final loan amount. This also serves to validate the initial buyer offer.
The report of the appraiser reinforces that the house is a sound investment for the buyer and the lending company. If the property is valued significantly lower than the initial offer, however, then the buyer can renegotiate the offer price.
Real Estate Appraisal Costs
A residential real estate appraisal costs between $300 and $400, depending on the area and the company. The cost for a real estate appraisal is determined by the size of your home, the location of your property, and the company you pick to do the inspection.
Elements of a Real Estate Appraisal
A real estate appraisal is comprised of four main parts, including the property description, market information, best use, and property valuation. Collectively, these four pieces are used by the lender to determine the home loan amount.
These are the four main sections of a real estate appraisal:
- Property description: This is the section where the appraiser details the basic information about the property―sometimes with pictures―like the number of rooms, square footage, attached land size, and other features unique to the property.
- Market information: This area of the report focuses on the neighborhood, trends in real estate in this location, how the market is developing, and what other houses with similar features are selling for in the area.
- Best/highest use: The best use section talks about how the property can be used to ensure the property retains its value. For a home, the continued occupation by owners is the most likely recommendation because this is the use type that yielded the current property value.
- Property valuation: The property valuation section of the real estate appraisal uses one of the property values approaches below to determine a likely sale amount if the buyer defaulted on his or her loan and the property needed to be resold.
Many people confuse a real estate appraisal with other types of home inspections, like termite or sewage inspections. A residential real estate property appraisal, however, only involves examining the property for foundational or structural damage or anything that might negatively affect an investment due to costly repairs. Determining an accurate valuation is the priority for a real estate appraiser because it is the basis for the bank’s approved loan amount.
3 Ways Appraisals Determine Property Values
Property valuation, which is part of a real estate appraisal, is calculated using one of three different approaches: a sales comparison, cost, or income approach. These give both the lender and buyer an idea of the property value. The approach used by an appraiser is dependent on the type and use of a property.
Here are the three property value approaches used in a real estate appraisals:
- Sales: This type of real estate appraisal is used for most single-family dwellings. This method determines property value based on what other properties in the area/neighborhood with the same features sold for in the last year.
- Cost: The cost approach is commonly used for properties not sold on the open market like schools or hospitals. This judges the cost of rebuilding a property with similar features in the present economy.
- Income: The income method is used for properties that generate income for the buyer or represent an investment, such as apartment buildings, rental houses, and commercial spaces. This type of real estate appraisal takes into account how much can be charged to tenants and lessees in the current market.
By using one of these methods for a real estate appraisal, the final valuation report reflects the value of the property and―or does not support―the price of the property set by the seller. The approach is decided upon by the inspector and is dependent on the type of property.
7 Pro Tips for a Successful Residential Real Estate Appraisal
It can be difficult to understand the role of the appraiser in the real estate sales process and how an appraiser protects the buyer during the homebuying process. With this in mind, we asked seven top real estate appraisers and agents to share their best tips for a successful residential real estate appraisal.
Here are the top seven pro tips for making the most of your real estate appraisal:
Frequently Asked Questions (FAQs)
Who pays for and picks the real estate appraisal company?
The buyer pays for the real estate appraisal as a part of the closing costs. If you are using a Federal Deposit Insurance Corporation (FDIC)-insured lender like a bank or credit union, then they will pick the appraisal company. If you are not using lending sources for a mortgage, then you can pick your own appraisal company.
Does the seller see the real estate appraisal?
The seller does not get a copy of the real estate appraisal unless you give it to them. In cases where you want to negotiate the price after the appraisal, you might need to supply the seller with a copy of the report to justify your request to lower your offer.
What should you do if your real estate appraisal is inaccurate?
If the real estate appraisal contains inaccuracies like the wrong house area comps or features, then you can report these issues to the appraiser. Your real estate agent can help you review the report and figure out where the problems are if you get an unexpected result.
Can your agent do your real estate appraisal?
Some real estate agents can do appraisals because they are trained and certified for a home inspection. A real estate agent representing the buyer or the seller should not do a home appraisal for your property, however. A home appraisal should be completed by an impartial third party with no ties to either the buyer or the seller.
How do I find a real estate appraiser?
You can ask your agent or a real estate lawyer for a reference for an appraiser. If you would rather research appraisers yourself, then you can use the Appraisal Institute’s advanced search to find an appraiser in your area.
Bottom Line: Residential Real Estate Appraisals
A residential real estate appraisal is a report from an independent, trained inspector hired to determine the value of a property based on home or sales values in the area, damage to the property, and overall property condition. A home appraisal costs between $300 and $400 and is paid for by the homebuyer. A home appraisal makes sure that the seller’s asking price is in line with the value of the home so that a buyer does not overpay.
An appraisal— alongside real estate contacts and sales documentation—can be full of hard-to-understand legal terms and concepts. Rocket Lawyer can look over home appraisals, offer letters, and contracts for a fraction of the price of a lawyer to help you fully understand every part of the homebuying process. Find out more about Rocket Lawyer’s services today.