9 Things You Need to Know About a Home Appraisal

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The first time you purchase a home, you may worry whether you are paying too much. Fortunately, assuming you are applying for a mortgage, there is a value check built into the purchase process: the home appraisal.

Basically, the bank will send an expert to evaluate the home you want in the context of nearby recent sales, and tell you whether it's worth the contract price. If the appraiser says it's not, the bank won't finance your purchase at that price. Either the sale is off, or you'll have to renegotiate the price or add more cash to the deal.

Appraisal day can cause anxiety for both buyers and sellers, but understanding these key things about the process can make it less nerve-wracking:

1. Appraisers Aren't Making This Up as They Go

Appraisers are required to be licensed or certified, and they generally go through a standard evaluation process, filling in spaces on a template from Fannie Mae. Aspects of the home that affect the valuation include: square footage, number of bathrooms, number of bedrooms, and needed repairs. (See also: 5 Appraisal Facts That Could Save You Big Money)

2. Your Home Isn't the Only One the Appraiser Looks At

Besides the condition and features of your home, the other important factor for valuation is the selling price of other homes in the area. The appraiser will search recent sales for homes as similar to yours as possible, and use their selling prices to estimate an appropriate selling price for yours.

3. The Buyer Pays for the Appraisal

Although the appraisal is really for the lender's benefit, and the lender orders it, the lender will typically send the appraisal bill, usually several hundred dollars, to the buyer.

4. The Appraisal Doesn't Substitute for a Home Inspection

An appraiser is looking over your house to gauge its general condition on a scale of 1 to 6, with the bottom half of the scale indicating that serious repairs are needed. An inspector will meticulously test every system of your home, making sure the furnace works, the water pressure is good, etc. Just because an appraiser said the house is in good condition does not mean you can skip the inspection report.

5. Appraisals Aren't Just for Home Sales

Any time you take a loan on a property, the lender will likely need an appraisal. So you may have to pay for one when you refinance your mortgage or take out a home equity line of credit.

6. Sometimes the Appraiser Doesn't Need to Enter the Home

Although less common than they were before the housing crash, drive-by appraisals, where the appraiser evaluates the house by looking at the exterior and using comparable recent sales, still happen. If you had a recent appraisal, and you are refinancing, the bank might be okay with a drive-by, which will probably cost you less.

7. You Don't Have to Be Present for the Appraisal

Buyers typically don't attend a home appraisal, but it's fine for the seller to be in the home during the appraisal. In fact, it could be helpful because the appraiser may have questions for the homeowner. It might be useful for the agent to be present as well, and it's often recommended that owners provide written information, such as a list of improvements and repairs they've done.

8. You Are Entitled to a Copy of the Report — Read It Carefully

The Consumer Financial Protection Bureau requires lenders to provide homeowners with a copy of the appraisal report at no additional cost. When you get it, check it carefully for errors, especially if the appraisal came in lower than you expected. You can appeal if the appraiser missed something important, or if you feel the comparison sales they chose were inappropriate — for instance, if one of the comparisons was in terrible condition or much smaller than your house.

9. You Can Hire an Appraiser Before You Sell Your Home

There are two reasons you might consider hiring your own appraiser: You want to know how much your house is worth before listing it, or you are deciding whether to undertake repairs or improvements before listing it.

Usually, it's the agent's job to help you set a selling price. If you doubt your agent's estimate, or if you're getting conflicting estimates from different agents, you could hire an appraiser to settle it. However, there are cons to this practice as well as pros. Don't expect the buyer's lender to use your pre-appraisal — they'll still want their own.

As far as assessing the value upgrades might add to your home, an appraiser can be really valuable in saving you from investing dollars in the property that you won't get back. However, a knowledgeable real estate agent should have ideas about this as well.

Have you ever been dissatisfied with an appraiser's report?