An appraisal is a professional third party valuation of a property. In residential purchases & refis it’s primarily used by lenders to confirm a property’s value. Appraisals are heavily regulated, especially on classic/standard loans. After the 2008 meltdown, regulators began mandating the use of AMCs to mitigate unfair and/or inappropriate influences on an appraiser’s opinion of value.

Key takeaways:

  • As of mid-2024, residential appraisals cost between $650-$1000.

  • Although you pay for it, the appraiser does not work for you. They’re contracted by the bank to give the bank an unbiased, third party report.

  • An appraisal can “fail” in two ways: the appraiser’s opinion of value comes in below the contract’s price OR the property has/is missing things critical to occupant health & safety.

  • “Failed” appraisals can be corrected by renegotiating terms, remedying health & safety shortfalls, or challenging the appraiser’s opinion.

  • FHA & VA appraisals are more rigorous and have stricter requirements. This can affect an offer’s attractiveness in the eyes of sellers.

  • Since 2008, many rules & regulations are now in place to ensure appraisers are as insulated from borrowers, Realtors, and myself as possible.

COST & ROLE

The borrower(s) are responsible for the appraisal’s cost. That cost is dependent on (1) the size & location of the property, (2) appraiser backlog or oversupply, and (3) how inflation has generally affected all prices. As of July 2024, residential appraisals are ranging between $650-$1000 and commercial appraisals are a minimum $2000. A recent 5-unit, 5300sqft commercial appraisal in 2024 came in at $4000.

A common mistake borrowers will make is assuming the appraiser works for them. Although the borrower pays for the report, the appraiser is contracted by the bank, for the bank. The borrower always receives a copy of the report, but the report is made specifically for the lender. Consumers shouldn’t assume the appraiser has any allegiance to them.

An appraisal can cause problems one of two ways: (1) the property is missing key functions or components that could affect the health & safety of its occupants, or (2) the appraiser’s opinion of value is < the contract’s sales price. If a property “doesn’t appraise”, it means it’s failed one of the tests above (more commonly the 2nd).

CORRECTING/FIXING A FAILED APPRAISAL

WHAT HAPPENS IF A PROPERTY DOESN’T APPRAISE?

Appraisals can be revised to “As-is” (appraiser-speak for passing) if parties to the transaction can resolve the issue(s) that caused it to fail.

  • “Subject To”: Resolving #1 above (missing health & safety) is pretty straightforward; remove, install, or correct the issue and have the appraiser come out to re-inspect. Once satisfied, the appraiser will change the verdict of the report from “Subject To” (failing) to “As-Is” (passing). Solving the problem can be as simple as installing CO2 detectors or strapping a water heater, but others like an unpermitted room addition or conversion can single-handedly kill a deal. Some loans have stricter checklists than others.

    • *Note- this typically results in a $100-$300 re-inspection fee bc the appraiser has to make another physical trip to the property.

  • “Missed Appraisal”: Resolving #2 is trickier because the lender always uses the lesser of the sales price or appraisal value to determine LTV. And since lenders lend based on LTV, this could. If a property “comes in below value” it’s up to the parties to negotiate again- either buyer covers the difference, seller reduces price, both meet in the middle somewhere, or a few other creative solutions are implemented.

FHA/VA EXCEPTIONS

Notably, FHA & VA loan products have a much stricter list of requirements to receiving a passing appraisal. Many of these requirements are silly, but they’re required all the same. As a result, FHA/VA appraisals represent a higher risk of failure during escrow to listing agents & sellers, and that negative reputation can impact the attractiveness/competitiveness of an offer. Something to keep in mind.

The “cost to cure” (lender-speak for “what it takes to fix the issue”) is