Welcome, my first-time home buyers, to the thrilling world of real estate! As you embark on this exciting journey, there’s one crucial aspect that can make or break your dream home purchase—the appraisal. In this blog post, we’ll dive into the importance of appraisals, who doesn’t need them, what it means when an appraisal comes back higher or lower than the offer price, and the differences between FHA, VA, and conventional loan appraisals. So buckle up and get ready for an adventure in home valuations!

The Significance of Appraisals: Appraisers are like the Sherlock Holmes of the real estate world—they determine the fair market value of a property. Lenders require appraisals to ensure they’re not lending more than a property is worth. Think of it as an extra layer of protection for both you and the lender, ensuring that you’re making a sound investment. Here in Colorado, an appraiser is ordered by the lender, but it’s an out of pocket expense for you, so be prepared for this. On average, you can expect to pay between $400 and $700 for a residential appraisal. However, keep in mind that these figures are approximate and can vary based on individual circumstances and the appraiser’s fees.

Who Doesn’t Need an Appraisal: While most home purchases require an appraisal, there are a few exceptions. Cash buyers, for example, may opt out of an appraisal since they’re not relying on a lender’s funds. Additionally, in certain cases, private agreements between buyer and seller may bypass the appraisal process. These instances are rare, and it’s advisable to consult with a real estate professional to understand your specific situation.

Higher Appraisal, Hooray!: Picture this: The appraisal comes back higher than the offer price. Cue the confetti! This is a victory for both the buyer and the seller. You may gain instant equity, have more borrowing power, or negotiate better terms. It’s like finding a treasure chest buried in the backyard!

Low Appraisal Blues: On the flip side, a low appraisal can bring temporary disappointment. When an appraisal comes in lower than the offer price, it may affect the buyer’s ability to secure a loan for the full amount. This news can feel disheartening, but don’t lose hope just yet.

Options for Moving Forward: When facing a low appraisal, you have a few options to keep the purchase on track. First, you can renegotiate with the seller to lower the price. Second, your realtor can challenge the appraisal by providing additional evidence of the property’s value. Better comps, or maybe some other factors that add value to the home. Lastly, if all else fails, you may need to walk away from the deal. Consult with your real estate agent and lender to determine the best course of action for your specific circumstances. One thing I tell my clients is that an appraiser doesn’t really care if it’s a brand new roof, or the floors have been replaced… Yes it adds value to you as the buyer, but to the appraiser, all homes have roofs, and a floor is a floor is a floor…. Unless they’re made out of solid gold… it really doesn’t make a difference to them. Make sense?

Appraisal Timeframe and Factors: Once the appraisal is ordered, an appraiser typically visits the property within a week. They thoroughly examine the home’s condition, size, location, recent sales of comparable properties, and any additional features that may impact value. Factors such as square footage, number of bedrooms and bathrooms, and property upgrades play a significant role in determining a home’s value. On the other hand, personal items and subjective aesthetics, like your extensive unicorn collection, won’t affect the appraisal.

FHA, VA, and Conventional Loan Appraisals: Now, let’s demystify the differences between these three types of appraisals. FHA appraisals are geared towards Federal Housing Administration loans and emphasize health and safety standards, ensuring the property meets certain requirements. If you’re a first time home buyer and utilizing any down payment assistance here in CO, this is likely the type of appraisal you’ll be getting. VA appraisals are specific to Veterans Affairs loans and include a focus on the property’s condition and livability for veterans, and in my experience tend to be the most knit-picky about things like chipped paint on the exterior or wobbly handrails. If you’re a seller who’s house needs some love, be prepared for a list of conditions that will need to be remedied BEFORE the transaction can continue. Conventional loan appraisals follow guidelines set by Fannie Mae or Freddie Mac and generally focus on the property’s market value, and less on the condition of the home. If you’re going conventional, you can pretty much buy the home in any condition, as long as the value matches what you’re paying for it.

Let’s dive a little deeper into the specific details that appraisers look for when conducting FHA and VA appraisals, as well as the potential flags or conditions that may need to be addressed:

FHA Appraisals:

Safety and Security: FHA appraisers prioritize the safety and security of the property. They will carefully inspect the home for potential hazards such as faulty electrical systems, peeling lead-based paint (for homes built before 1978), and structural issues.

Health and Habitability: FHA appraisals place importance on the overall livability of the property. Appraisers will check for adequate ventilation, proper plumbing, functioning heating systems, and safe water supply. They will also ensure that the property meets local health codes and regulations.

Property Condition: The appraiser will assess the general condition of the property, both inside and out. This includes examining the roof, foundation, walls, and flooring for any signs of damage or deterioration. Any major issues that affect the habitability or structural integrity may need to be addressed.

Property Access: FHA appraisers need unrestricted access to all areas of the property, including crawl spaces, attics, and utility rooms. If access is limited or obstructed, it may delay the appraisal process.

Appropriate Utilities: The home must have access to public water and sewage systems. If the property relies on a well or septic system, it must meet FHA guidelines for functionality and safety.

VA Appraisals:

Minimum Property Requirements (MPRs): VA appraisals adhere to a set of Minimum Property Requirements. These include items such as a functioning heating system, safe electrical and plumbing systems, and a structurally sound roof. The property must also meet local building codes.

Pest Infestation: Appraisers will thoroughly inspect the property for any signs of pest infestation, including termites or other wood-destroying organisms. If an infestation is found, it must be treated and repaired before the loan can proceed.

Property Safety: Similar to FHA appraisals, VA appraisers prioritize the safety of the property. They will look for potential hazards such as broken windows, exposed wiring, or other safety concerns that need to be addressed.

Structural Integrity: VA appraisals focus on the structural integrity of the property. Appraisers will examine the foundation, walls, and overall construction for any significant issues that may affect the property’s value or pose safety risks.

Both FHA and VA appraisals aim to ensure that the property is safe, habitable, and meets certain standards. Addressing any flagged issues or conditions identified by the appraiser is crucial to move forward with the loan process successfully. It’s important to work closely with your real estate agent and the appraiser to ensure any necessary repairs or improvements are made to meet the specific requirements of the FHA or VA appraisal.

Remember, appraisers are looking out for your best interests as a buyer, and their assessments contribute to the overall integrity and value of the property. By understanding the unique criteria for FHA and VA appraisals, you can be better prepared to address any flagged conditions and move forward confidently in your home buying journey.