Reviewed by: Brandon Brown
Appraisals are an essential component of any home transaction, from selling to buying to refinancing your mortgage. For many homeowners, the exact factors that determine a home’s appraisal value can be hard to pinpoint, but understanding the home appraisal process can ward off any confusion and ensure that you get the best deal for your property. A low appraisal value can potentially delay transactions or even lead to canceled deals entirely. Read on as we dive into all things appraisals, including what can affect the appraised value of your home.
What Is a Home Appraisal?
A home appraisal is an objective, unbiased professional opinion of a home’s value. They are almost always used for refinance transactions, as well as the purchase and sale of a property. A mortgage lender usually orders an appraisal report to determine how much to lend a borrower and ensure that the loan amount doesn’t exceed a home’s appraised value. Remember, the property acts as collateral for a mortgage, meaning if you default on your loan, the home goes to the lender to sell. Giving you more money than the home is worth means that the mortgage lender loses money.
This is distinct from a home’s fair market value. Market value is determined by the consumers and the local market. While this does have some overlap with the appraised value, fair market value is more dependent on market trends and comparable property in your neighborhood.
Appraisals are performed by a third-party known as a home appraiser. Every state requires that any given professional appraiser is certified or licensed and familiar with the local market. Most importantly, home appraisers must be unbiased, impartial, and free of any actual interest in the transaction. This keeps the home appraiser from swinging one way or the other when assessing home value.
Home Appraisal vs. Home Inspection
At face value, appraisals and inspections can seem similar. They both involve a third party evaluating a home and looking for potential flaws, but they serve distinct functions. Where appraisals determine the property value of a home, a home inspection looks specifically at things that can (or should) be repaired or replaced.
Appraisers do a visual check of your home, but certified home inspectors look at and test the function of the home’s foundational systems, including the plumbing, HVAC, and appliances. An inspection can potentially save you money in the long term by confirming that a property does not have any major issues. If an inspector does find major issues, a home buyer may be able to ask the seller to have those issues taken care of or negotiate a lower price.
Most importantly, home inspections ensure the safety of the potential home buyer. Interested buyers don’t want to move into your home and realize that the property has massive mold issues or a backyard dirt pile that is a landslide waiting to happen.
Inspections are not generally required for purchase-and-sale transactions the way that appraisals are. However, FHA and VA loans do require them. Either way, most experts recommend inspections.
Factors That Determine Home Appraisal Value
The value of your home appraisal is determined by a wide range of factors, each of which carry different weight when evaluating your home. Some of these are things you can potentially change, while others remain more static.
One of the most important factors appraisers take into account during the home appraisal process also happens to be the one you can’t really control. The location of your home, specifically the neighborhood, can dictate the appraisal value of your home more than most other factors. Some neighborhoods naturally hold greater appeal than others, which also makes the homes in that area more desirable and, thus, more expensive. A neighborhood’s value itself comes down to all kinds of factors, including:
- Crime rate
- Proximity to schools, hospitals, and other necessary services
- School district ratings in the area
- Beaches, parks, and other amenities
The physical location and positioning of your home also affects your home’s appraisal. A property in a quiet area in the back of the neighborhood will likely have a higher value than a property on the corner of a loud, busy intersection.
Construction Materials and Upgrades
The quality of the construction materials can determine a property’s lifespan. A home built with sturdy, modern materials will likely have a higher appraisal value than a home that hasn’t been updated in the past century. That includes the exterior walls and foundation, as well as the roof, gutters, and floors. Anything affecting the integrity or livability of the home can reduce the appraisal value
General upgrades to the property can also benefit a home appraisal report, including:
- Any energy-efficient additions, like solar panels or high-efficiency doors and windows
- New fencing
- Wood stoves and fireplaces
- New insulation
- A new HVAC system
A lack of upkeep can also have a negative effect on the overall appraisal process, thus contributing to a lower evaluation of your home. Paint peeling from the walls, missing doorknobs, and a leaky faucet don’t necessarily equate to bad quality, but they do point to poor maintenance.
Age does matter when it comes to appraisals, but it can get a little complex. Newer isn’t necessarily better or more valuable. Older homes that have been well-maintained or updated can come with a high appraisal, especially if they are located in historic districts. Newer homes are less likely to have major issues or repairs, making them a lower risk for buyers.
Bedrooms, Bathrooms, and Square Footage
Generally, the more bedrooms and bathrooms that you have, the higher the appraisal value. Much of this comes down to comparisons with similar, nearby homes located within the same neighborhood, but a one-bedroom home will always have a lower value than a two- or three-bedroom home. The same applies to bathrooms. Two full bathrooms will always go for more than one and a half bathrooms.
This is also where square footage comes into play. A larger space will, of course, have a higher appraisal, but appraisers also keep in mind the usage of that space. How much of that space is usable and livable?
Current Market Trends
Much of the appraisal is influenced by the current real estate market. Homes tend to be appraised at a lower home value during buyers’ markets and higher during sellers’ markets. A lot of this depends on broader economic trends, local demand, and the availability of mortgages. Trends can also vary at all levels, from national to regional to local.
What Won’t Influence Appraisal Value
While a home’s existing design has an effect on the appraisal value, home appraisers don’t really take into account your own personal design choices. Rugs, shutters, furniture, and everything else that goes into a home’s aesthetic are largely forgettable to a licensed appraiser.
The general rule of thumb: if it’s nailed down, it’s considered part of the house. That means that anything moveable or otherwise not directly attached to the house is considered personal property and won’t factor into the appraisal. That said, items like utility sheds and hot tubs, which are considered personal property, will not add appraisal value, but most real estate agents agree that they still contribute to the marketability of your home.
Home appraisal isn’t an exact science, but knowing the factors at play can help you understand what to expect and how to prepare, whether you’re buying or selling. At FlipSplit, we can help you formulate a home appraisal preparation checklist and will guide you every step of the way. Interested in strategies to sell a house quickly? We’ve got you covered.
Contact us today to get your appraisal started!
Reviewed by: Brandon Brown
As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.