The listing price of a home does not affect the home's appraisal. In fact, the opposite is true. Homeowners usually do not hire an appraiser to value the home before listing it for sale. Instead, they often rely on a real estate agent to price the home. When the lender orders an appraisal as part of the mortgage approval process, the deal can fall apart if the home is not valued at or above the sale price.
When you hire a real estate agent to sell your home, the goal is to get the home sold. The price is subject to the current market conditions. Home prices are like the weather, constantly changing and varying based on the location. If it is a buyer's market, your agent may price the home lower to compete with the other homes on the market. A seller's market will typically get higher asking prices. There are other variables the agent will consider when pricing your home, including how fast you have to sell. If you do not need to sell right away, you can hold out for a higher price. The listing agent can determine the price based on the sales of comparable homes in your neighborhood.
Although the real estate agent knows the market and can price a house accordingly, only an appraiser can accurately assess the value. Property appraisals generally use either the sales comparison approach or the cost approach to determine a home's value. In the sales comparison approach, the property is compared to the recent sale prices of several similar homes. The appraiser looks for properties with a comparable lot size, square footage, style and age. Permanent fixtures and improvements can increase the value when compared to other homes. The cost approach method estimates the cost of replacing the property, including any improvements made to the home. The replacement cost is added to the value of the land to determine the value.
How an Appraisal Affects the Sale
While the listing price is not necessarily a factor that affects the appraisal, the appraisal can affect the sale. If a buyer wants to finance the home, the bank orders an appraisal to determine if the home is worth the sale price. When a home does not appraise high enough, the lender will not approve the home for the mortgage. Your contract will likely give you the option to walk away from the deal without losing your earnest money deposit. The seller may be willing to lower the price to reflect the lower appraisal. If you still want the home, you may need to place down a higher down payment to compensate for the difference between the sale price and the appraised value.
Options if the Appraisal Falls Short
For a buyer who has her heart set on a property, it can be discouraging if the appraisal falls short. However, it is important to pay an accurate price. Appraisals are objective. If the appraiser does not have knowledge of the area, it can affect the appraised value. If there were not enough comparable properties recently sold in the neighborhood, the appraiser may branch out into a nearby area, which could also result in an inaccurate assessment. The person who pays for the appraisal is entitled to a copy of the report. In most sales, the buyer is responsible for paying for the appraisal. The buyer can share the report with the seller, if she chooses. Both parties can review the report to check for errors in the structure, such as the wrong square footage or incorrect year built. If an error is discovered, it should be pointed out to the appraiser so the report can be adjusted. Either party can also hire another appraiser to review the report and verify the comparable homes were geographically relevant and included the same features. If the buyer can prove the first appraisal was inaccurate, the lender may agree to a second appraisal.
- MSN Real Estate: Eight Tips for Pricing Your Home in a Buyer's Market
- Chicago Tribune: How Appraisal Complicates Home Purchase
- MSN Real Estate: How to Challenge That Low Appraisal
- Consumer Financial Protection Bureau: What is an Appraisal?
- Rocket Mortgage. “Refinance Appraisal vs. Purchase Appraisal.” Accessed June 8, 2020.
- Rocket Mortgage. “Home Appraisal: What Is It, And What Does It Cost?” Accessed June 8, 2020.
- Appraisal Institute. "Frequently Asked Questions," Page 1. Accessed June 8, 2020.
- Fannie Mae. "Uniform Residential Appraisal Report (Form 1004)." Page 4. Accessed June 8, 2020.
- HUD.gov. “Streamline Your FHA Mortgage.” Accessed June 8, 2020.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.