Home Appraisals Explained
What a home appraisal is, how appraisers determine value, what happens when an appraisal comes in low, and how sellers can prepare.
When a buyer finances a home, the lender almost always requires an appraisal: an independent opinion of the property's market value by a licensed or certified appraiser. The lender wants to make sure the home is worth at least what it is lending against.
Appraisal vs. inspection
An inspection evaluates condition for the buyer's benefit. An appraisal estimates value for the lender's benefit. Appraisers note condition only as it affects value or safety requirements.
How appraisers determine value
For homes, the sales comparison approach dominates. The appraiser chooses recent comparable sales and adjusts for differences such as square footage, bedrooms, bathrooms, lot, condition, updates, garage, and location. They may also consider the cost approach (what it would cost to rebuild, minus depreciation), which is more relevant for new or unusual properties.
What happens if the appraisal is low
If the appraisal comes in below the contract price, the lender will base the loan on the lower value, so the buyer would need more cash to close. Options include:
- The seller lowers the price to the appraised value.
- The buyer pays the difference in cash.
- The two sides split the gap.
- Requesting a reconsideration of value, with better comparable sales the appraiser may have missed.
- Canceling under an appraisal contingency, if the contract includes one.
How sellers can prepare
Provide a list of upgrades with dates and costs, share recent comparable sales your agent considers relevant, make sure the home is clean and accessible, and fix obvious safety issues.
Appraisal waivers
For some conventional loans with strong equity and data available, lenders may offer an appraisal waiver or a data-based valuation instead. That can speed closing, but buyers lose an independent check on value.
If you believe there's bias
Fair housing laws prohibit discrimination in appraisals. If you believe an appraisal was affected by bias, you can request a reconsideration of value through your lender and file a complaint with the appropriate state appraiser board or with HUD.
This article is for general educational purposes and is not financial, legal, or tax advice. See our disclaimer.