An appraisal is a professional third party valuation of a property. In residential purchases and refis, it’s primarily used by lenders to double-check the value of the property.

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 value of the property 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 or remedying health & safety shortfalls.

  • FHA & VA appraisals are more rigorous and have silly requirements. This can and does 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.

Appraisers are conducted by licensed appraisers and, in my personal opinion, go through FAR more rigorous training and licensing requirements than is worth what they’re paid. 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 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 will always receive a copy of the report, but the report is made specifically for the lender and 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 pass (appraiser-speak for passing) if parties to the transaction can resolve the issue(s) that caused it to fail.

  • Resolving #1 above (missing health & safety) is pretty straightforward- remove, install, or correct the issue and have the appraiser come out to re-inspect. *Note- this uaually means a $100-$300 re-inspection fee due to the appraiser for having to come back. 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.

  • Resolving #2 is trickier because the lender will always use the lesser of the sales price or appraisal value as the final value. 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. I dare say many are silly, but they’re requirements nonetheless. As such, 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.

Though the borrower(s) are the ones who pay for the appraisal, the

• Appraiser works for the bank
• Appraisal Value
• Appraisal "Doesn't Appraise"
• FHA/VA Appraisals

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