What an Appraisal Does in a Home Purchase
An appraisal is an independent, licensed assessment of a home's market value, ordered by the lender to ensure the loan amount does not exceed what the property is worth. When buying a home, the appraisal protects both the buyer and the lender from overpaying. It examines the property's condition, size, location, and comparable sales in the area, then produces a valuation that can make or break a deal.
More from this site
Keep reading the latest coverage
The buyer typically pays for the appraisal out of pocket, often a few hundred dollars, and the lender selects the appraiser from a third-party pool to maintain impartiality. The buyer is not usually present during the interior inspection unless the lender requires it, but they will receive a copy of the final report.
How the Appraisal Process Works
Lenders order the appraisal after a purchase agreement is signed and contingencies are in place. The process generally follows these steps:
- The lender assigns a certified or licensed appraiser.
- The appraiser conducts an interior and exterior inspection, noting the home's layout, condition, upgrades, and any deferred maintenance.
- The appraiser researches recent sales of similar properties, known as comparables or "comps," within the neighborhood.
- The appraiser adjusts the value of those comparables based on differences like square footage, condition, or location.
- The appraiser delivers a final report to the lender, which is also shared with the buyer.
Appraisals typically take one to two weeks from order to delivery, though complex properties or slow market conditions can extend the timeline.
What Appraisers Look for in a Home
Appraisers use a combination of the sales comparison approach, cost approach, and income approach, depending on the property type. For most single-family homes, the sales comparison approach dominates. They evaluate:
- Lot size, neighborhood trends, and proximity to schools or transit.
- Square footage, number of bedrooms and bathrooms, and functional layout.
- Condition of the roof, foundation, HVAC, plumbing, and electrical systems.
- Recent renovations, finishes, and upgrades that add value.
- Any deferred maintenance, water damage, or safety issues that reduce value.
Appraisers do not comment on whether a home is a good investment or overpriced in a personal sense. Their job is to report an objective market value based on data and physical inspection.
What Happens When the Appraisal Comes in Low
A low appraisal means the lender will not finance the purchase at the agreed price. This is one of the most common appraisal contingencies in real estate contracts. When this happens, the buyer has several options:
- Negotiate a lower price with the seller, using the appraisal as evidence.
- Cover the gap by increasing the down payment to make up the difference between the appraised value and the contract price.
- Challenge the appraisal by providing additional comparable sales or evidence of recent upgrades the appraiser may have missed.
- Walk away using the appraisal contingency clause without losing the earnest money deposit, if the contract includes one.
A low appraisal is more common in fast-rising markets where contract prices outpace recent sales data. Sellers can reduce the risk by providing a pre-listing appraisal or a list of recent upgrades and comparable sales.
How Buyers Can Prepare for an Appraisal
Buyers cannot control the appraiser's opinion, but they can reduce surprises by understanding the process and sharing relevant information. Providing the lender or agent with a list of recent improvements, permits, and upgrades gives the appraiser a clearer picture. Attending the inspection, when allowed, can also help clarify questions about finishes or systems.
Understanding appraisal contingencies before writing an offer is essential. In competitive markets, buyers sometimes waive the appraisal contingency to make their offer more attractive. That decision shifts the financial risk entirely to the buyer and should only be made with careful consideration of the local market and price range.
Appraisal vs. Home Inspection: Two Different Purposes
An appraisal and a home inspection serve different roles in the buying process. The appraisal determines market value from the lender's perspective, while the home inspection evaluates the condition and safety of the property from the buyer's perspective. Both can reveal issues, but an appraisal focuses on value, and an inspection focuses on repair needs, defects, and long-term maintenance concerns.
Because they operate independently, a home can pass inspection but appraise low, or appraise at value while hiding a serious defect. Buyers should budget for both and understand that neither replaces the other in a standard purchase.