Home Appraisal: Everything You Need to Know

Key Takeaways

• An appraisal is a valuation of property such as real estate by an authorized individual who must be designated as such by a regulatory body governing the appraiser’s jurisdiction.

• A home appraisal establishes the property’s value to make sure its price reflects the house’s condition, location, age, and features such as a finished basement or number of bedrooms.

• If a homebuyer’s valuation comes in under the purchase price, the buyer can choose to ask the seller to renegotiate the price to bring it closer to the property’s appraisal value.

Homebuyers and investors in real estate would do well to fully understand property appraisals, including how they work and what to do if theirs comes in too low. After all, an appraisal is a turning point in the real estate transaction — and can potentially make it or break it.

With that said, here is:  home appraisal — everything you need to know.

What is an Appraisal?

An appraisal is a valuation of property such as real estate by an authorized individual who must be designated as such by a regulatory body governing the appraiser’s jurisdiction. In addition to real estate, such property can also include an antique, collectible, or business, for example.

Official appraisals, meant to be fair and unbiased, are commonly utilized to set a potential selling price for a property or item, and for insurance and taxation purposes. 

Appraisals are also often conducted to establish the value of a charitable donation for itemized deductions. Some types of insurance policies that goods being insured are appraised. There may also be an appraisal clause that, in the event of a dispute between the owner and insurance company, the two parties will secure an appraisal from a mutually agreed-to appraiser.

Primarily, though, appraisals occur in real estate.  They are a big deal, as mortgage lenders are apt to reject a loan application if the valuation is less than the home purchase price.  

Types of Home Appraisals

The process of buying or selling a home, or the refinance of an existing mortgage, usually requires a home valuation.  In fact, an appraisal is an essential part of the process, as the outcome can potentially cost money, delay, or even scuttle the whole transaction.

The appraisal seeks to verify that the home’s sale price is aligned with fair market value. If it is, the investor or homebuyer does not pay more than the property is worth, and the lender does not lend more than the house is worth.

The appraisal’s accuracy is of utmost importance because the property secures the loan – it is the borrower’s collateral. The lender, likewise, will seek an appraisal to confirm market value when a homeowner is seeking to refinance their mortgage. 

The different types of home appraisals include:

• Full home appraisal. Here, the appraiser inspects the home’s interior and exterior.
• Drive-by, or exterior only. Just as it sounds, an appraiser will only drive by the property and take photos.
• ACE + Property Data Report (PDR). Qualified borrowers with Freddie Mac-backed mortgages can use this instead of a full appraisal.
• Automated Valuation Model. This is a computer program that employs an algorithm to figure a property’s value. 

What is the Process of Home Appraisal?

A home appraisal establishes the property’s value to make sure its price reflects the house’s condition, location, age, and features such as a finished basement or the number of bedrooms. Lenders benefit from valuations in that they are less likely to lend more than the property is worth.

Should the borrower default, the lender uses the appraisal as the home’s valuation should there be a subsequent default, wherein the home must be sold to recoup losses.

The process generally works like this: the appraiser will visit the property – the buyer and seller may request to be present — and utilize the collected information to establish an appropriate estimate for its value. At this point, the appraiser will also examine the values of comparable area homes. Subsequently, the appraiser will prepare an appraisal report that will include a dollar figure that represents the property’s perceived value.

Copies of the report, which will generally take a week to 10 days to complete, will go to the purchaser and their mortgage lender, although the seller may also request a copy.

Should the buyer dispute the appraisal report, they may seek a lender reconsideration or pay for a second appraisal.

What Does a Home Appraiser Look For?

There are a number of elements home appraisers consider when fixing a home’s value, including:

• The home’s location
• Characterization of the neighborhood (rural? urban? growing?)
• House layout
• Square footage of house and lot
• Any hazards such as flood dangers
• The condition and age of the home’s foundation, walls, roof, and overall structure
• Condition of the home’s appliances
• Any amenities such as a deck, swimming pool, or tennis court
• Price ranges and sales trends for comparable area homes  

There are various valuation methods an appraiser can employ to determine a property’s appropriate value, such as comparing similar objects’ or properties’ current market value.

How Much Does an Appraisal Cost?

Appraisers charge either an hourly rate or flat fee for their services, which cost between $300 and $450 on average, often depending on the property’s size. Usually, the buyer is responsible for covering appraisal fees.

What if the Appraisal Comes in Too Low?

If a homebuyer’s valuation comes in under the purchase price, the buyer can choose to ask the seller to renegotiate the price to bring it closer to the property’s appraisal value. Another option, if the buyer has the means, is to make up the difference between the lender’s offer and the appraised value.

If the sale contract contains an appraisal contingency, the buyer can potentially step away from the deal and have their deposit refunded.

How to Improve Your Home’s Appraisal Value

While appraisals are supposed to be objective, appraisers are people, after all. Thus, there are ways to optimize the valuation of one’s home that are not that expensive or time consuming:

• Make sure rooms are spare and uncluttered, as that sends the message that the home is well kept.
• Make minor aesthetic enhancements to the house’s exterior appearance.
• Apprise the appraiser of any big improvements made, to make certain they know about them. 

Home inspection vs Home Appraisal

Although the terms are often conflated, a home appraisal is different from a home inspection, which is conducted to establish the property’s condition and identify any prospectively serious issue before a buyer advances to closing. An appraisal assesses the home’s value as a dollar amount.

Investing in Real Estate

There are a number of ways to invest in real estate, which continues to be popular. After all, since 2000, private real estate has outperformed stocks as well as fixed income on a risk-adjusted and absolute basis. 

Further, real estate has historically outpaced inflation and because it does not directly correlate with public markets, it can help reduce overall investment portfolio volatility. Real estate can also provide tax advantages.

The alternative investment platform Yieldstreet, on which $4 billion has been invested to date, with a 9.6% IRR, as of 10/31/2023, is an all-in-one marketplace for alternatives. Such assets — “alternatives” to stocks and bonds – include art, transportation, crypto, private credit, and more, including real estate.

Yieldstreet has raised more than $900 million across more than 100 highly vetted real estate offerings, with minimums as low as $10,000.. Thus far, more than $350 million in principal have been repaid to investors.

Rather than investing directly into a property, fractional real estate exposure can be gained through Yieldstreet’s REIT (real estate investment trust). In all, Yieldstreet provides such exposure through debt and equity investments, directly as well as indirectly.

Another major benefit of investing in real estate is diversification – the spreading of one’s investments both among, and within, varying asset classes – which can reduce overall portfolio volatility as well as risk and can potentially improve returns. In fact, diversification is widely considered a foundational element of long-term investment success.  

Portfolio Diversification and Alternative Investments

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Banks will generally not lend money if the property’s appraised value is less than the overall loan. So, appraisals are a necessary and crucial part of buying or selling real estate. That is why it is important to know what appraisers look for and what moves to make if the appraisal is too low. Remember, too, there are many ways to invest in real estate, which also serves the essential purpose of investment diversification.