The Real Esate Appraisal

An appraisal is a dispassionate, third-party estimate of the value of a piece of property. It can either give you peace of mind by affirming your offering price or it can put the kibosh on a transaction entirely.

As part of your loan application, you will pay for your lender (typically $200 to $400) to order an appraisal to estimate the current market value of the home you want to buy. You may also opt to hire an appraiser yourself before you make an offer to help you determine the price you bid on a house. Lenders require appraisals before they will approve and fund a loan in order to ensure that the home is worth the amount of money you are asking for. While most appraisals match up with what buyers want to borrow, some do not, which can send a lender backing out of your loan commitment. Understanding how real estate appraisals and appraisers work can help you deal with the consequences.

Why do appraisals go awry?
Most appraisal problems boil down to two things: incomplete information on the property or incompetence of the appraiser.

Incomplete information often comes with the appraisal territory. All appraisals must conform to guidelines set by the Federal Reserve, but ultimately every appraisal is a subjective analysis of a property's current market value. To arrive at that number on your house, an appraiser will compare your house with that of three comparable homes in the area that have sold within the past six months and adjust for differences in the properties. They will photograph, measure and inspect the home (do NOT consider this your home inspection, however) to help them make their comparisons. But true market value can be difficult to ascertain in markets where prices are volatile and properties widely vary.

Incompetence in the field can cause appraisal problems, too. Not all real estate appraisers are created equal in terms of licensing and education. While federal licensing requirements for everyone are being phased in, only about half the states currently require appraisers to be licensed, though most states do require appraisers to pass a written examination and have 75 hours of continuing education and 2,000 hours of direct experience. Inexperience can be a big culprit in a problem appraisal, so can downright incompetence.

Boosting the appraisal
A lender probably will reject your loan application if the appraisal of the property comes back lower than the asking price. But you can fight a low-ball appraisal. Here's how:

Get a copy of the appraiser’s report. You can successfully argue to raise the estimated value if you show that the report overlooks a valuable feature of the home or failed to consider the recent sale of comparable property for a higher price.
Take your case to your loan representative. The lender can override the estimate or order a new report from a different appraiser.
Try to renegotiate with the seller. The seller may be willing to accept less than you originally agreed to pay in order to avoid the time and cost required to cancel the sale and put the house back on the market.
Increase your down payment. The lender may be willing to overlook a low appraisal if you put more money down.

Find a good appraiser
Ask your lender for the names of appraisers they know, trust and have on their list of approved appraisers. You also can check with one of several national appraisal organizations for names of local appraisers who are members in good standing. Look for an appraiser who can do your appraisal in a timely manner and who has experience in the area you want to buy. This can help speed things along, and assure you of an accurate appraisal.

TIP: If you do choose an appraiser from your lender's list to check out a house, and you end up making an offer, you may not have to pay again for the required loan-application appraisal.

Quick Take
If you have any question about the value of the house you are bidding on, add an appraisal contingency to your purchase offer. This provision stipulates that the property must appraise for at least the purchase price you're offering. If the appraisal comes in lower, you can back out of the deal or renegotiate price.