Understanding the Appraisal
What is an appraisal, and why does it matter when you're buying a home?
If you're financing your purchase with a mortgage, your lender will generally require an appraisal before approving the loan. The appraisal provides an independent opinion of the property's value and helps the lender determine whether the property provides sufficient collateral for the amount being financed.
An appraisal is different from a home inspection. An inspector focuses primarily on the condition of the property, while an appraiser focuses primarily on its value.
Who Orders the Appraisal?
Your lender typically orders the appraisal after you're under contract.
Although you're usually responsible for the appraisal fee, neither you nor AED Realty selects the individual appraiser. Mortgage lenders generally use an independent appraisal process designed to keep the valuation separate from the parties involved in the transaction.
Once the appraisal is completed, your lender will receive the report and can provide you with a copy.
How Does an Appraiser Determine Value?
The appraiser evaluates the property and considers relevant market information to develop an opinion of value.
That can include factors such as:
Location
Property type
Overall size and living area
Lot size
Number of bedrooms and bathrooms
Age and condition
Features and improvements
Recent comparable sales
Current market conditions
The appraiser will generally compare the property with similar homes that have recently sold and make adjustments for meaningful differences.
An appraisal is still an opinion of value, which means two qualified professionals could reach somewhat different conclusions about the same property.
Is the Appraisal the Same as a Home Inspection?
No.
A home inspection is performed primarily to help you understand the property's condition.
An appraisal is performed primarily to establish an opinion of the property's value for your lender.
An appraiser may identify certain observable conditions that affect value or lending requirements, but an appraisal should not be considered a substitute for a professional home inspection.
What Happens If the Home Appraises at the Purchase Price or Higher?
Usually, not much—and that's generally good news.
If the appraisal supports the purchase price and the property satisfies the lender's requirements, the financing process can continue.
An appraisal above the purchase price also doesn't mean you automatically have instant equity equal to the difference. The purchase price remains the amount you agreed to pay, and your lender will calculate the loan according to its lending guidelines.
What Happens If the Appraisal Comes in Low?
A low appraisal means the appraiser's opinion of value is below the agreed-upon purchase price.
For example, suppose you agree to purchase a property for $400,000, but the appraisal comes back at $385,000. Depending on your financing and contract, that $15,000 difference could affect the amount your lender is willing to finance.
That doesn't necessarily mean the transaction is over.
Depending on the circumstances and your contract, possible options may include:
Asking the seller to reduce the purchase price
Negotiating another solution with the seller
Bringing additional funds to closing
Challenging or requesting reconsideration of the appraisal when appropriate
Exploring financing alternatives with your lender
Exercising applicable contractual rights
Which options are available will depend on your purchase contract, financing, and individual circumstances.
Can an Appraisal Be Challenged?
There may be circumstances where your lender allows a reconsideration of value.
For example, there could be factual errors in the appraisal or relevant comparable sales that weren't considered. AED Realty can help review the report from a real estate perspective and provide additional market information or comparable sales when appropriate.
That doesn't guarantee the appraised value will change. The appraiser remains responsible for the independent opinion of value, and the lender controls its appraisal-review process.
What Is an Appraisal Contingency?
Depending on the contract, your offer may include provisions addressing what happens if the property does not appraise at a sufficient value.
The exact language matters.
An appraisal contingency should not simply be interpreted as an automatic right to cancel whenever an appraisal is below the purchase price. Your rights and obligations depend on the contract you've signed.
If an appraisal creates a contractual issue, your attorney can advise you regarding your legal options while AED Realty helps you evaluate the real estate and negotiation considerations.
Can I Waive an Appraisal?
There are two different things people sometimes mean by "waiving the appraisal."
A buyer may agree to limit or waive certain contractual protections related to a low appraisal as part of an offer strategy. That doesn't necessarily mean the lender won't still require an appraisal.
Separately, a lender may determine that a traditional appraisal isn't required for a particular loan and property.
Those are very different situations. Before agreeing to modify or waive appraisal-related protections, you should understand the potential financial risk.
Where Does the Appraisal Fit Into the Buying Process?
The appraisal usually happens after you've completed the earliest stages of the transaction and while your lender is working toward final loan approval.
A simplified timeline looks like:
Offer Accepted → Earnest Money → Attorney Review & Inspection → Appraisal & Financing → Final Walkthrough → Closing
While the lender manages the appraisal process, AED Realty continues monitoring the transaction and coordinating with you, your lender, attorney, and the listing side as you move toward closing.
One More Step Toward Closing
An appraisal can feel like a major hurdle because it's one part of the transaction you can't directly control. Most of the time, though, it's simply another step in the financing process.
If an appraisal issue does arise, we'll help you understand what it means, evaluate the available options, and work with your lender and attorney to determine the best path forward.
See How Everything Fits Together
From your first conversation through closing day, see the major milestones involved in purchasing a home.
This information is provided for general educational purposes and is not intended as legal, appraisal, tax, or lending advice. Contract terms, lender requirements, and individual circumstances vary. Consult your attorney, lender, appraiser, or other appropriate licensed professional regarding your specific transaction.