What Is a Home Appraisal?

A home appraisal is an unbiased professional opinion of a home’s value. Appraisals are often used in purchase-and-sale transactions and commonly in refinance transactions. In a purchase-and-sale transaction, a home appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinancing transaction, a real estate appraisal assures the lender that it isn’t handing the borrower more money than the home is worth.

Lenders want to make sure that homeowners are not overborrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The real estate appraisal helps protect the lender against lending more than it might be able to recover.

The Home Appraisal Process and How Values Are Determined

Because the home appraisal primarily protects the lender’s interests, the lender will usually order the appraisal. An appraisal costs several hundred dollars and the borrower generally pays the fee. However, the borrower may not be entitled to a copy of the appraisal report.

According to the Canadian National Association of Real Estate Appraisers, a qualified appraiser should be licensed or certified and be familiar with the local area. The real estate appraiser must be impartial and have no direct or indirect interest in the transaction.

A property’s appraisal value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, the floor plan’s functionality, and the square footage are also key factors in estimating the home’s value. The appraiser must perform a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needed repairs or mold.

What Is a Home Appraisal Report?

The real estate report asks the appraiser to describe the interior and exterior of the property, the neighbourhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on their observations.

The appraisal report typically includes:

• A street map showing the appraised property and comparable sales used
• An exterior building sketch
• An explanation of how the square footage was calculated
• Photographs of the home’s front, back, street scene and interior photos
• Front exterior photographs of each comparable property used
• Other pertinent information—such as market sales data, public land records, building costs, and public tax records—that the appraiser requires to determine the property’s fair market value

What Homebuyers Need to Know About Home Appraisals

When you’re buying a home and are under contract, the home appraisal will be one of the first steps in the closing process. If the real estate appraisal comes in at or above the contract price, the transaction proceeds as planned. If the real estate appraisal comes in below the contract price, however, it can delay or derail the transaction.

Chances are that neither you nor the seller wants the transaction to fall through. As the buyer, you have an advantage, in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price. The bank won’t lend you or any other prospective buyer more than the home is worth.

Though home appraisals help buyers avoid overpaying for homes, a seller may feel that a low appraisal is inaccurate and be reluctant to drop the price. If a poorly developed appraisal is standing between you and your home purchase or sale, look into getting a second opinion via another appraisal by a different person. Appraisers can make mistakes or have imperfect information, and appraisals can be affected by bias. 

What Home Sellers Need to Know About Home Appraisals

As a seller, a low appraisal, if accurate, means you may have to lower your home’s price to get it sold. Holding out for an all-cash buyer who doesn’t require a home appraisal as a condition of completing the transaction is unlikely to net you a higher sales price. In fact, you will likely spend more time on the market and net less in the end.

Unfortunately, if your surrounding area has experienced recent distressed sales, that can lower your home’s valuation. If you feel that your home’s value has been dragged down by the sale price of nearby foreclosures and short sales, you may be able to convince the real estate appraiser that your home is worth more if it’s in significantly better condition than those properties.

What Refinancing Homeowners Need to Know About Home Appraisals

If you’re refinancing a conventional mortgage, a low real estate appraisal can prevent you from doing so. The home needs to appraise higher than the amount you want to refinance for your loan to be approved. 

How Long Does a Home Appraisal Take?

The home appraisal process takes 2 to 3 days. The appraiser visits the property and spends an hour or two inspecting the home’s interior and exterior, measuring the square footage, and evaluating the home’s features and fixtures. The real estate appraiser also compares the home to other similar, recently sold homes in the neighbourhood (aka “comps”). After doing the physical inspection and locating and analyzing the comps, the home appraiser writes an appraisal report. The amount of time it takes for the entire process depends on the complexity of the home appraisal and the appraiser’s workload or schedule.

How Much Does a Home Appraisal Cost?

Home appraisals typically cost between $350 and $650 The home’s location, size, and condition factor into the cost. Real Estate Appraisers should work on a flat fee or hourly basis. 

What Happens After the Appraisal?

After the home appraisal is completed, the next step is mortgage underwriting. The underwriter reviews the loan file to make sure everything is in order and that all the required documents have been submitted. The underwriter then assesses the risk associated with the loan and either denies or approves the loan based on all the information.

What Lowers a Home Appraisal?

The home’s location has the biggest impact on the valuation. For example, the value will be negatively impacted if the home is in an undesirable neighbourhood or situated next to a junkyard, power lines, or a busy street. Though you can’t change the property’s location, you can do something about other factors that could lower the home appraisal. For instance, you can increase your curb appeal, make sure the house is clean, and take care of any small repairs and routine maintenance.

The Bottom Line

When everything goes smoothly, the home appraisal is just another box to check on a closing checklist. When the home appraisal value is lower than expected, the transaction can be delayed or even cancelled. Regardless of which situation you encounter in your home buying, selling, or refinancing experience, a basic understanding of how the home appraisal process functions can only work in your favour, especially if you’re buying your first home.