Home Why to Think Like an Appraiser When Buying Your First Home

by Alaina Tweddale | May 27, 2020

Buying a home — particularly your first — often feels like an emotional roller coaster ride (buckle up!).

How can you get a better handle on balancing the heart and the head?

Look to home appraisers, who do this every day. It's their job to review a home for sale with an unemotional eye, make a solid evaluation of its market value and determine that the asking price is fair. Generally, residential home appraisers follow guidelines set forth by the Uniform Standards of Professional Appraisal Practice (USPAP) and then layer on any additional requirements from the lender providing the home loan.

What if a first-time homebuyer could borrow from an appraiser's toolkit to tackle this important decision? Here is some wisdom from appraisers to help first-time buyers make a savvy choice when selecting a home.

Why do you need an appraisal?

A home lender — a bank or other creditor — requires an appraisal to ensure the home is worth what the buyer is paying, and to help determine if a lender is likely to be repaid for the loan if the home must be sold because the buyer defaults on the mortgage loan.

This is a key step in getting a mortgage and acts as a safeguard for the bank. Plus, a home that's damaged beyond repair or overpriced for the market could tank even the most careful saver's entire financial plan. Ultimately, it's a win-win situation where both banker and homebuyer can benefit from an appraisal.

“The fair market value of a home is an unbiased opinion. The appraiser has no agenda other than to make sure the property isn’t overpriced,” says Gynell Vestal, owner of Vestal Appraisal Solutions in Houston, TX, and founder of the Consumer Home Value website.

Vestal feels the appraisal process can also help safeguard the larger economy. How? Because economic bubbles (where the price of something exceeds the actual value) can occur when too many homebuyers pay too much, and then can't later sell their homes for what they thought they were worth. Fair appraisals can keep a bubble from ballooning, and, ultimately bursting.

While it's typically the mortgage lender that orders the appraisal, the homebuyer foots the bill. The cost can vary based on the home but typically ranges between about $300 and $400. The appraiser is required to disclose any information that is integral to the valuation of the property in the appraisal report. Lenders are in turn required to forward a copy of the appraisal report to homebuyers if the loan is a first lien.

Sami Sada, an independent home appraiser with Sada Associates, recommends an appraisal, even for cash buyers who aren't seeking a mortgage. Otherwise, a buyer can easily pay more than a fair asking price, particularly in an area where homes sell quickly and decisions can be made hastily. “A few hundred dollars is a good investment when you’re investing hundreds of thousands of dollars in a property,” Sada notes.

The fair market value of a home is an unbiased opinion. The appraiser has no agenda other than to make sure the property isn’t overpriced.
End Quote

Can my real estate agent appraise my home?

“One of the misconceptions is that appraisals aren’t needed because real estate agents can assign value,” Vestal explains. “Real estate agents can handle the sale and facilitate the transitions, but an appraisal is much more analytical. We study the data to see how it affects value and marketability.”

At the same time, a real estate agent can serve as a source of important information for homebuyers. In most U.S. states, selling (also called “listing”) agents are expected to disclose facts about a home, such as its structural condition, that may influence its marketability. (Consider looking up the laws governing home sales and disclosures in your state.) If you buy directly from the owner (For Sale By Owner) — meaning no selling agent is involved — it could be a big risk, according to Sada. He wouldn’t recommend taking the risk unless the asking price is at least 10% below what it would be through a real estate agent.

Couple opening front door of new home

What factors affect the appraised value of a home?

“Real estate is so micro in nature; so much depends on what is acceptable or expected in a particular neighborhood,” Vestal says. For example, hardwood floors may be the expectation in one neighborhood while they’re an upgrade in another.

Comparable sales (commonly known as comps) offer a qualitative comparison of recently sold homes that share certain features — like number of bedrooms — within a specific geographic area. Comps are used to determine a home's listing price.

An appraisal, meanwhile, includes similar neighborhood and community information but also adds in many more property-specific details; these factors can have a marked effect on the ultimate appraised value of the home. Sometimes those numbers — the comps and a home's appraised value — don't line up.

Value is based on the comps within a defined neighborhood, within a recent time period (ideally within 120 days). The more sales there are in a specific area during that time, the more comps there are for an appraiser to choose from. More reference points means more latitude to find the most accurate homes to use for comparison.

Still, there are certain factors important to an appraiser that a homebuyer can use when shopping.

There are certain factors important to an appraiser that a homebuyer can use when shopping.
End Quote

Location is king, as expected. Does the home back up to commercial businesses or the interior of the neighborhood? The market’s reaction to those variables is important, and these features can be desirable in one area while undesirable in another.

Size of home. Anything greater than the standard size of 1,500-1,800 square feet will add value, up to a point. As home size increases, however, the value per square foot decreases.

Number of bedrooms. A fourth bedroom adds a good amount of value while the value of adding a fifth, sixth or seventh decreases incrementally.

Number of bathrooms. Same goes for bathrooms: After two or two-and-a-half, the value of each added bathroom decreases. “The third bathroom won’t add as much value as the second bathroom,” says Sada.

Number of garages. There is a home-price jump from a one-car garage to two. However, there is not much value for anything above a three-car garage.

Quality of materials and upgrades. Custom cabinets, higher-quality countertops and high-end appliances will all add to the value of a home. So will a room’s accessibility and functionality. How easy is it to navigate the kitchen, for example? What is the access like from refrigerator to stove to sink?

Convenience factors. Proximity to public transportation is important in urban areas; accessibility to conveniences like highways and shopping are a plus in the in suburbs. Features that inconvenience a homeowner will reduce value. Think: a kitchen on a second floor (common in modern two- or three-level condominiums) or entry through a garage or long hallway.

Regional variances. In some regions, it's the norm to have finished basements, attics or garages. These spaces aren’t included in the livable square footage but can “affect marketability and add some contributory value,” says Vestal. That’s what Jennifer Whigham experienced when she purchased her three-bedroom end-unit town home in Coatesville, PA. “The home had a finished basement that was grandfathered into a pre-existing code,” she says. “The result was that a homeowner wouldn’t be able to finish another similar basement at the same cost.” For Whigham, that finished basement added a lot of value.

a man and a woman sit together on a couch in their new living room

Does it matter how long a home has been on the market?

Average days on market in an area can be an indicator of the direction of housing prices. More than 90 can indicate a slowing market while fewer than 20 can indicate a market is hot. A stabilized market is generally found between 30 and 45, according to Sada.

If a home has been on the market for more than 100 days, a homebuyer may want to ask why. It could just be that the seller has set constraints (like stipulating showings must be by appointment), but it could be a sign of a larger problem, like an issue flagged by an inspection.

If a home has been on the market for more than 100 days, a homebuyer may want to ask why.
End Quote

What if the appraised value doesn’t match the offer price?

Although three-quarters of home settlements happen on time, appraisal issues account for 20% of those that don't. A common concern is when the real estate agent's Comparative Market Analysis (CMA) doesn't match the appraiser's assigned value.

That’s what happened to Natascha Martens after she bid on her first home in Austin, TX. Her dream home appraised for substantially less than the offered price, but she and her husband loved it so much that they negotiated with the buyers to split the price difference. That type of negotiation isn’t always possible. In addition, in some cases, your lender may be able to request more information about specific items within the appraisal report, particularly if any documentation errors are found or if the comps are out-of-date.

You may want to discuss with your realtor your rights and options under the purchase agreement to require the appraised value be no less than the purchase price, if you want the right to walk away if the value is lower. That's what making an unemotional decision is all about.

Alaina Tweddale

is a Philadelphia, PA-based freelance writer who has bought and sold several homes. An appraisal report once saved her from a very expensive home buying mistake. She's eternally grateful.