If you’re selling a house for the first time, pricing it correctly and securing a good appraisal are crucial steps in the home-selling process. So it’s important to be prepared.
Appraisals carry a lot of weight, and closing a sale can hinge on the results. Thus ensuring you’ve correctly priced your home at the listing stage is key. An acceptable appraisal is a primary contingency for many buyers, with 43 percent of buyers including that contingency in their offer, according to a January 2020 report from the National Association of Realtors.
To help you navigate this make-or-break part of the home-selling process, here are six things you need to know about the home appraisal process and how to appropriately price your home to ensure a successful sale.
Deciding on a Sale Price
You need to think strategically when pricing your property to sell. Your price is what prospective buyers will zero in on, and it’s the amount an appraiser will need to verify too.
Your agent will put together a comparative market analysis report, which provides a detailed look at how much similar homes (comparables, or “comps”) have recently sold for in your neighborhood. Appraisers will also focus on comparable sales in the last three months and within a half-mile radius of your home.
In evaluating comps, you should consider neighborhood dividing lines, especially if recent sales are from homes on the other side of a freeway or train station. Size and age matter too: Comps should include homes of similar age, and square footage should stay within a variance of about 10 percent up and down. Be honest with yourself too: If your home is a fixer upper, it won’t command a sale price similar to the one for the house down the road that just went through extensive renovations. In addition to currently listed homes, pay attention to homes that are pending sale and to withdrawn and expired listings. Because of the wide range of factors, homes on the same street could see a disparity in sale prices of up to $100,000.
Ultimately, you should price your home within the parameters of what the CMA suggests is the going price. Ninety-nine percent of recent sellers typically sold their homes for 99 percent of the listing price, and 23 percent reported reducing the asking price at least once, according to NAR estimates.
You can also use automated valuation models, or online home value calculators, for additional research. You simply plug in your postal code and your home’s specs and an algorithm spits out an estimated value.
Getting Your Home Appraised
Once you’ve accepted an offer and signed a contract, you and the buyer enter the “option period,” which is when the buyer kicks into high gear to do their homework on your home. With a deposit handed over in good faith, the buyer will schedule a home inspection and an appraisal to get third-party opinions of the property. This usually happens within a week of accepting the offer.
Appraisals provide an independent and impartial analysis of the property, according to NAR, and provide lenders’ peace of mind. Your buyer will likely need a mortgage to afford the home, and their financial institution needs to make sure your home is a responsible investment. Lenders won’t provide a loan for more than what the property is worth. If a buyer can’t keep up with their mortgage, their lender needs to ensure they can recoup the cost by selling the property in a worst-case scenario.
So, for example, you have priced your home at $250,000, and the buyer agrees to this price. The lender may not see eye-to-eye on that amount if the appraisal comes in lower at, say, $230,000. That’s a $20,000 disparity your buyer won’t have covered.
Because appraisals are often a key contingency in contracts, the buyer could walk away from the deal scot-free if your home ends up with a low appraisal.
Conducting an Appraisal
Appraisers typically use a form called the Uniform Residential Appraisal Report to conduct their work. An appraiser will document your home’s age, construction quality, the integrity of your property’s roof and foundation, and even the health of your gutters and siding. They’re looking at the layout; number of rooms; if there is an attic, basement or crawlspace; and even the size of your driveway. The appraisal can range from 30 minutes up to three hours.
External factors like your home’s proximity to good schools, community centers and other conveniences are considered too. The appraisal form includes lines on improvements made to the neighborhood, and if it’s in a Federal Emergency Management Agency-designated flood area. Housing trends, neighborhood demographics and how the home fits into the neighborhood also help to inform the appraiser’s narrative.
An appraiser will use photos, floor plans and measurements of your home, along with comparisons to properties that have recently sold nearby, to compile a property and market analysis report with an estimated value of your home. The report is provided directly to the lender after about seven to 10 business days, and the buyer and seller can ask for a copy as well.
Appraisals cost about $500, depending on your location and the size of your home. Buyers pay for this cost, even though this report is for their lender. Lenders have a third-party appraiser they turn to for this step, usually a professional with expertise of the region.
Appraisals vs. Inspections
Home inspections typically happen days before the appraisal. While appraisals consider the fair market value of your home, an inspection is looking at the nuts and bolts of your property for any problems or issues.
A home inspector is looking at the condition of your home’s structure, roof, electrical system, plumbing and the exterior. They’ll study the interior and exterior of your home for defective, hazardous or mechanical problems throughout your property. They’re also checking for termites and pests. They’ll produce a report to the buyer outlining what was inspected and what requires repair.
When Your Home Fails to Appraise
If the appraisal matches the buyer’s offer, you can seamlessly move into the next step of closing on your house. But if you do end up with a lower appraisal, you have a few options.
Negotiate with the buyer on how to foot the difference. Between a down payment and closing costs, the buyer may not be able to afford the difference between what their lender will cover in a mortgage and their offer price. In this case, you may have to reduce your asking price to match the appraisal or meet somewhere in the middle. Work with your real estate agent to negotiate with the buyer to gauge how keen they are for the sale to go through.
If you need to sell as quickly as possible, you can offer to cover closing costs or pay for certain repairs. Ideally, both parties find a happy compromise to save the sale.
Keep in mind that if the sale was contingent on the appraisal matching the offer value, the buyer can walk away from the contract without any penalties.
Submit a reconsideration of value to the lender. While this doesn’t always yield a change of heart with the lender, you could provide additional information to explain how you valued your home. If, for example, a comparison home highlighted in the appraisal sold for far less because it came from a divorce sale that needed to close quickly, this may be useful information for the lender.
Order a second appraisal. A second opinion could lead to a valuation that’s closer to the buyer’s offer price, but it might require the buyer to secure a different lender. If you the seller are pushing for a second opinion, you would have to pay for it.
Preparing for a Successful Home Appraisal
You want to make sure your home is putting its best foot forward for the appraiser’s visit.
Tidy up. To make a great first impression, give your home a deep cleaning and stage each room as if you were hosting an open house. Highlight the special features of your home that may elevate its value, such as a striking fireplace, crown molding or imported tiles.
Conduct any repairs and paint jobs. Repairs make a world of difference. If the appraiser thinks you haven’t looked after your home, they may devalue your home thinking it hasn’t received adequate maintenance. Some won’t even carry out an appraisal until fixes, such as a broken window or a faulty lock, are made.
Keep your pets and kids away. It’s okay if you’re home during the appraisal, but try to stay out of the way so the appraiser can take measurements and photos without any disruptions or distractions. For this reason, it’s best to keep your young children and pets at a neighbor’s or family member’s house. Try to be as accommodating to the appraiser as possible. Your agent may also be present if the appraiser has any questions about your home.
Consider a pre-listing appraisal. The most proactive way to lock in your sale price is to get a pre-listing appraisal before your home even hits the market. In this instance, a pre-listing appraisal helps you get the upper hand in knowing precisely how much an appraiser will value your home at so there are no surprises.
If your home is custom or comes with a lot of unique features, a pre-listing appraisal may be even more beneficial. It’s also important in situations when the real estate market is fluctuating quickly, changing how much homes are being valued at. If you don’t want to pay for a pre-listing appraisal, you can review old appraisals, such as the one used when you purchased the home, to see what problems were flagged.
Collect homeowner’s documents. Gather your land survey to verify your property size, compile a list of renovations to you home including invoices and warranties, and provide proof of your home’s sale price and if you received other offers. This paperwork helps you — and the appraiser — with the process.
With a successful appraisal, you’ll be well on your way to closing on the sale of your home. And if you’re looking to build your next home — your dream home! — you can see what’s available in your area at NewHomeSource.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. She started her career in journalism writing about crime and local news for the Toronto Star, Canada’s largest daily newspaper. After that, she covered a variety of subjects from federal politics in Ottawa to the 2015 attacks in Paris. She has also worked as senior health reporter for Global News and as now the Parliamentary Affairs Manager for UK Research and Innovation. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.