How Does a Home Appraisal Work?

Homeownership By Noah - April 1, 2020

If you’re hoping to buy your dream home or refinance your current home to use some of your hard-earned equity, the appraisal step in the process can be a major nail-biter.

A home appraisal is an impartial, professional assessment of your home’s value. It includes the value of your house as well as the land and any other permanent structures on the property. Appraisals are a must-have step for most home sales and refinancing agreements — basically, anytime you’re involving a lender to finance the house. The appraisal value assures the lender that they’ll be able to recoup their investment in a worst-case scenario.

The appraisal value tells lenders how much to let buyers borrow for a mortgage, or how to set home equity partnership terms. So what happens if the appraisal value comes back lower than you expected? Understanding how appraisals work can help you spot the difference between normal estimate variance and a faulty appraisal, and what you can do to get the most value possible out of your home.

What are the 3 types of appraisal reports?

There are a few approaches to a home appraisal, which can make sense for different circumstances.

Electronic appraisal

Some mortgage and real estate listing sites use publicly available stats on a property and sales on comparable homes (“comps,” as they’re known in the biz) to generate an estimated appraisal value. This is great for researching the local market, and estimates are often pretty close to accurate. But it’s not the same as having a professional come and assess your home in person.

Drive-by appraisal

In a drive-by appraisal, an agent takes photos of the exterior of the property and uses this data along with comps to set a value. This is a common approach for county officials who need to update property taxes. Lenders who are concerned about foreclosure on a property may use a drive-by appraisal to check on the basic condition of the home.

Traditional appraisal

In a traditional appraisal, an impartial, professional appraiser comes and visits the property in person. The appraiser looks at public records and data on number of bathrooms and bedrooms, as well as comps. In their visit, they also take note of the property’s present condition. This means noting updates and renovations that might not show on public records yet, or spotting water or mold damage that can lower the home’s value.

Having someone physically tour the property can offer more chances to take your individual work on the house into account. It also means the appraiser may notice things, both good or bad, that lead to a different appraisal value than something like a Zillow estimate will offer.

What factors does an appraiser consider?

One common misconception is that an appraisal is all about the house itself. In fact, a professional appraiser considers the entire property’s value, so a big yard, pool, porch, and other features are also part of the assessment.

What do they look for in a home appraisal?

When you’re getting ready to partner with Patch Homes, you’ll work with a third-party appraiser to get an unbiased report of your home’s value. Your appraiser will tour your home and base their appraisal on these factors:

  • Court records for the number of bedrooms and bathrooms
  • Comps, which give a sense of the housing market in your specific area
  • General condition of the property (the appraiser will take photos to include in their report)
  • Any major updates or renovations (Did you replace the roof or HVAC, or install fancy new kitchen cabinets and appliances? Let the appraiser know about work you’ve done.)
  • Any issues that could take away from the home’s value (Do you have mold or water damage in the basement, a cracked driveway, or possible “termite dirt” in the attic? That’s likely to take a bite out of your appraisal total.)
  • Sometimes, minor issues can add up. You’re not necessarily going to lose $1,000 over a single squeaky hinge, but a lot of dings, dents, and peeling paint throughout the property can add up to a lower value of the general condition.

Home factors appraisers ignore

Some sources recommend that you deep-clean your home and get the yard in pristine condition before the appraiser comes by. While there’s nothing wrong with a cleaning spree, professional appraisers are trained to look past everyday messes. A serious hoarding problem could impact your home’s value, but your toddler’s Legos on the floor aren’t going to negatively affect an appraisal. Other factors the appraiser won’t include in the report include:

  • You’ve left last night’s dirty dishes in the sink
  • Your lawn’s not mowed to golf course perfection
  • Your front yard flowers won best in the HOA garden contest
  • You’ve installed a fancy new chandelier and trendy “floating” shelves in the kitchen

Surprised by the positive items? While some freshening up can improve the curb appeal and marketability of your home, appraisers aren’t generally interested in anything that’s easy to change. That means you won’t typically get penalized over tiny flaws or a little clutter, but it also means minor improvements don’t add official appraisal value, either.

What if the appraisal comes back low?

So you’ve received the official appraisal results, and it’s not what you hoped. It looks like your home is worth thousands less than you thought. Meanwhile, online estimates still list higher figures, What gives, and is there anything you can do? How do you read an appraisal?

Check percentage, not price

If you’re concerned about a discrepancy between an online estimate and your appraisal, calculate what percentage the change is.

Let’s say an online estimate valued your home at $400,000. The professional appraiser who toured your home says the property is worth $390,000. That’s only a 2.5 percent difference. Zillow’s data suggests that nationwide, about half of their Zestimates on-market homes are within 2 percent of selling price, and half aren’t. For off-market homes, the difference between Zestimate and selling price jumps to 7.5 percent. So if the percentage difference is small enough, it may be that the in-home appraisal included a few additional factors that led to an adjusted value.

Talk to the real estate appraiser

Of course, $10,000 is still a lot of money. If you feel like in your case, a difference happened because the appraiser didn’t consider everything they should, it might be worth bringing specific points to their attention.

Ideally, get your materials in order before the appraisal date:

  • Official paperwork, like a recent tax bill and HOA agreements.
  • Paperwork outlining unusual features, like larger-than-standard square footage, that may distinguish your home from comps.
  • List of major work you’ve done to the house, like replacing major appliances or building a deck.
  • Make sure it’s easy to access every part of the house, including the attic, basement, or crawl space.
  • Finish the “honey-do” list. There’s no better time to take care of those minor fixes you’ve been meaning to get around to.

If you’ve received the appraisal results and you think the appraiser overlooked certain aspects of your home, you can try making a list of the particular features you believe they missed. New comps might be a convincing piece of data to include, especially if you think the low value may have been the result of a seasonal slump in home sales. The appraiser might change their mind, or you might get a better explanation of how they calculated the value.

How accurate are home appraisals?

Home appraisers are professionals who have often assessed hundreds or even thousands of houses. They are also still human, and it’s not out of the question for someone to make a mistake.

If you’ve done your own homework on comps, submitted specific concerns to the appraiser, and you still think your home is being significantly undervalued, it might be time to ask for a second opinion.

Getting a second appraisal adds time and cost to the process, and you’re not guaranteed a better result. You’ll have the best chances of a favorable appraisal if you are prepared with solid data on your home and reasons why local comps might not be a good representation of the market (e.g., there’s been a lot of foreclosures and short sales). 

You deserve to feel confident before moving forward with a sale or other major agreement about your home. Reading the appraisal report, reminding yourself that a small percentage variance is common, or getting a second opinion if you’re still concerned about value discrepancy can reassure you that your home has been valued thoroughly and fairly.