Whether you’re buying or selling a home, the appraisal process is an important part of the transaction. Appraisals help to ensure that buyers are paying a fair price for a property. The appraisal will also be used by the lender to determine how much money they are willing to lend on the property. It also ensures that the seller is getting the full value for their home.

What is Fair Market Value?

The following is the definition of market value used in most mortgage transactions and comes from the Code of Federal Regulations.

Market value means the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • Buyer and seller are typically motivated;
  • Both parties are well-informed and acting in what they consider their own best interests;
  • A reasonable time is allowed for exposure in the open market;
  • Payment is made in terms of cash in U.S, dollars or in terms of financial arrangements comparable thereto; and
  • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” *

Who Does the Appraisal?

Appraisals are typically performed by licensed appraisers. The appraiser is an uninterested third party. That means they don’t have any skin in the game. They don’t control anyone’s motives, their level of knowledge, the marketing of a property or the financial arrangements. Appraisers don’t set a home’s value they discover it.

Federal regulations dictate how appraisers must behave throughout the appraisal process. After the mid-2000s housing crisis, the U.S. government wanted to increase appraiser independence to prevent the possibility of lending based on inflated home values. The Dodd-Frank Act and the Truth in Lending Act are among the regulations that require appraisals and evaluations to be conducted independently, based on established criteria, and free from outside influence.**

Because of this, there are very few acceptable interactions between an appraiser and the loan officer. In fact, loan officers and brokers can’t select the appraiser and neither can the borrower. For that reason many lenders order their appraisals through a third party called an Appraisal Management Company or AMC.

The Process of Appraisal

The appraisal process has three steps:

  1. The Appraisal Inspection – The appraiser will schedule an appointment to visit the home. They will review both the exterior and interior of the home to make sure it’s in good structural shape and to confirm there are no safety issues. They’ll take note of the number of rooms and their dimensions.  They’ll also check to see if there have been any major upgrades since the home’s last real estate transaction
  2. Research – This is an important part of the appraiser’s value determination.  They’ll examine the transaction records of properties similar to yours that have sold recently.
  3. Valuation – Based on the home visit and the research of recently sold like properties, the appraiser will decide the best approach to assign value to your home.
    • The cost-based approach is based on an estimate of what the cost would be to build the same home today, combined with the value of the land.
    • However, the sales comparison approach is the one most commonly used in residential real estate. It is based on the recent sales of comparable homes in your area.

Who Pays for the Appraisal?

The borrower must pay for the appraisal regardless of whether the loan closes or not because the appraiser still did the work. Since lenders can’t discuss a home’s value or anticipated “target value’ with an appraiser at the time of assignment, homeowners aren’t able to get an appraiser’s ballpark estimate before they pay for the service. Your Realtor® can research comparable properties (comps) in the area and give you some idea of what the appraised value would be.

Appraisal Tips for Sellers

Although the value the appraiser gives your home largely depends on the recent sales of comparable properties, you can do some things that can help your home come in at the higher end of the potential appraisal value.

Your property should be neat and clean, uncluttered, and easy to inspect. Any pets should be contained and any smells remedied. Technically it shouldn’t matter if your lawn isn’t mowed or your house is a mess. However, it’s important to realize that a dirty or unkempt home can increase the appearance of wear and tear beyond the norm. And that can, in fact, affect value. 

Things Appraisers Really Care About:

  • Exterior and interior conditions.
  • Total room count, with value added to bedrooms and bathrooms.
  • Functionality, including interior room design and layout, and functional obsolescence.
  • Improvements to kitchens and baths, windows, the roof, and the home’s systems (heating, AC, electrical, & plumbing) over the past 15 years that make the home more up to date, functional & livable by today’s standards.
  • Condition and age of the home’s plumbing, electrical & HVAC systems.
  • Exterior amenities such as detached garages. Pools and hot tubs will also add to a home’s value.
  • Location.
  • Unappealing appearance, such as an exterior appearance that’s inconsistent with the rest of the neighborhood will detract from the value.

What if I Don’t Agree With My Home Appraisal?

It can happen that sometimes the appraiser’s value is lower than you’d like it to be, or than you think your home is worth. While this is a trained and educated opinion, an appraisal is, after all, one person’s opinion. If you believe that the appraised value is too low, you can write a letter of appeal to the lender or the AMC.

But the chance of an appraiser changing their opinion is very slim, unless you have overwhelming evidence that the value is off. Your appeal will only succeed if you can show that the appraiser made a significant error such as listing the square footage incorrectly, disregarding an important amenity such as a pool, or disregarding a comparable sale that might support a higher value while choosing a less suitable comparable that would indicate a lower value.

The Bottom Line

Understanding how the appraisal process works will give you the best chance of getting an appraiser to assign the highest possible value to your property.

Contact the Donnelly Group

If you have questions about the appraisal process, the Donnelly Group have the knowledge and expertise to help you. Please don’t hesitate to contact our team at 480-792-9700 or by email.



* https://www.ecfr.gov/current/title-12/chapter-I/part-34/subpart-C/section-34.42

** https://www.govinfo.gov/content/pkg/CRPT-111hrpt94/html/CRPT-111hrpt94.htm