Understanding The Appraisal Process
Agents spend as much time (or more, depending on the client) answering questions as they do on paperwork, marketing and showing properties. Some of the most common questions that REALTORS field include how long it takes to buy a home, queries about fees and commissions, and credit score questions — whether it’s high enough and, if not, how to improve it before applying for a loan. Most agents are pretty quick to respond to these questions because, in part, they’re so ubiquitous. But there’s one area that does tend to stump many residential real estate professionals, and that’s how the appraisal process works.
Steve Kahane, President of the Association of Texas Appraisers, says he can’t stress enough how important it is for agents to understand lenders’ and clients’ role in the appraisal process. It could be the difference between a buyer getting the home of their dreams or that dream home slipping through a client’s fingers at the last minute.
Kahane, an appraiser in Houston for several decades, recently looked at classes approved by the National Association of REALTORS. He recalls that only two mentioned anything about how to value a home.
It’s been much longer than 10 years since the real estate market in Austin-Round Rock has been firmly in the grips of a supply-and-demand paradigm: Demand has been extremely high and supply has been painfully low. As a result, since the early 2000s, prices have been on an upward trajectory. And that makes understanding the appraisal process even more challenging. Too many buyers conflate demand with value and it jeopardizes their chances of closing, even after they’re in contract.
When agents can explain how the appraisal process works early on in the negotiating process, fewer deals are likely to fall through. It also means agents can help clients adjust their expectations and stay focused on properties they’ll be able to afford rather than those they believe are in their price range.
The first thing to understand is that for buyers who are applying for third-party financing (not including FHA or VA loans), an appraisal is not an option. All lenders require one.That can be a point of contention for some clients, especially those in Central Texas who seem to be emotionally committed to pay any price for a house, no matter how high.
According to Realtor.com, “Your home is [the bank’s] collateral, and if you can’t pay your mortgage, the [lender] wants to make sure they can get back as much of their money as possible.” It’s the appraiser’s job to tell the bank what their risk is. “Risk is always proportional to the rate of return,” says Kahane. “So if it’s a higher risk mortgage, the lender may want the buyer to put more money down or pay a higher interest rate.”
An appraiser is hired to be unbiased in their inspection and evaluation of a property and then assign it an objective market value. Just to be clear, an appraisal is not the same as an inspection. An inspection is for the buyer, an appraisal is for the lender.
Appraisers analyze the condition and location of the home and consider upgrades, renovations and any needed repairs. But if that was everything that entered into an appraiser’s report, then homebuyers in Austin would really be in trouble since the chasm between a home’s true objective value can be miles apart from a seller’s asking price. Appraisers also consider market forces when calculating a home’s worth.
Here’s an interesting quirk of the appraisal process: While buyers pay the fee for an appraisal, they don’t own the appraisal report — the bank does. After all, it’s the lender that’s making the biggest investment in the house, plus, they’re taking a chance on the borrower, too. “It’s one of the few things that consumers pay for but don’t own,” says Kahane.
Another common question that agents get at this point in the homebuying process is, “Well, how much will this appraisal cost me?” Like the rest of the seemingly opaque appraisal process, the answer is, “It depends.”
A quick Google search reveals that in 2022, an appraisal for a single family home in Austin runs anywhere from $450 to $800. Of course, no buyer wants to pay more than they have to, especially in today’s real estate climate. So some clients offer to hire their own appraiser. It’s almost predictable, by the minute, at which point in the purchasing process that tensions will start to flare. Not only do buyers pay the appraisal fee, appraisers are selected by lenders.
There is some good news, says Kahane. “Loan officers don’t get to pick the appraiser anymore.” To avoid the appearance of pressure or influence, lenders are required to have a separate department, like an appraisal panel or a third party appraisal management company, that handles appraiser ordering and management. Before this process was implemented by consumer protection legislation, there was little anyone could do to deter lenders from putting pressure on appraisers. “In the past, there was a conflict of interest because lenders’ income depended on appraisers making that value so they could close the loan and get their commission.”
The appraisal process doesn’t differ that much from state to state. “Like any laws,” says Kahane, “the federal government sets the minimum bar. Individual states can’t exceed those guidelines.” But thanks to the unique real estate market in Austin, the Texas Real Estate Commission provided a contractual addendum that gives buyers a chance to tell sellers what they’ll do in the event that an appraisal is low.
According to Texas REALTORS, the Third-Party Financing Addendum has multiple parts. A buyer can waive their right to terminate their contract in the event that the lender’s appraisal comes in under the sales price. The financial consequence is that the buyer will have to cover the difference between the loan and the agreed-upon sales price. For a partial waiver, both parties agree on the limit at which the waiver kicks in. This addendum is not required, especially when a buyer is not interested in terminating their contract based on a low appraisal value.
Kahane says that in his personal experience, most real estate professionals don’t know what appraisers do. “In fairness,” he said, “I don’t really know the day-to-day workings of other real estate professionals, either. But all of us would be better off if we understood these things a little more.”