An appraisal is an independent opinion of what a home is worth, ordered by the lender to make sure the loan is backed by enough value. The buyer usually pays for it, but the appraiser works for the lender, and rules keep loan officers and agents from influencing the result. If the value comes in at or above the price, the deal moves ahead. If it comes in low, someone has to make up the difference.
Here's what appraisers look at, how they arrive at a number and what buyers and sellers can do when the appraisal doesn't match the contract.
How appraisers arrive at a value
For most homes, the appraiser relies on the sales comparison approach: they find recent sales of similar homes nearby, then adjust for differences in size, condition, features and location. They also inspect the home, take measurements and photos, and review public records and the purchase contract.
The report most lenders use follows a standard format set by Fannie Mae and Freddie Mac. A redesigned version is being phased in, but the core questions haven't changed: what is this home, what condition is it in and what have buyers paid for homes like it?
Location and the exterior
Location sets the starting point. Appraisers look at the neighborhood, nearby schools and amenities, and anything that helps or hurts value, such as a busy road, a view or proximity to commercial property.
Outside the home, they note the age and condition of the roof, siding, foundation, windows and drainage, along with features like a garage, deck or pool. They're not doing a home inspection, but visible problems such as peeling paint, damaged siding or signs of water intrusion can lower the value or lead to a required repair before the loan can close.
Size, layout and lot
Square footage matters, but how it's counted matters more. Appraisers generally count finished, above-grade living space, so a converted garage, basement room or unpermitted addition may not count the same way as the main living area. The number of bedrooms and bathrooms, the layout and the size and usability of the lot all factor in.
If the home has an accessory dwelling unit, permits and how it's legally classified can affect how much value it adds. More on how ADUs work.
Interior condition and quality
Inside, the appraiser rates overall condition and the quality of materials and finishes. Kitchens and bathrooms get the most attention. They'll also note the age and working condition of major systems like heating, cooling, water heater and electrical.
Some items can be flagged as required repairs, especially on FHA and VA loans: safety hazards, missing smoke or carbon monoxide detectors, an unstrapped water heater, peeling paint in older homes or anything that affects whether the home is safe and livable. Those need to be fixed before closing.
Updates and improvements
Recent updates can add value, but rarely dollar for dollar. Appraisers credit improvements that buyers in that neighborhood pay for, such as an updated kitchen, renovated bathrooms, a newer roof or energy-efficient systems. Highly personal choices and over-improving for the area tend to add less.
Documentation helps. Permits, receipts and a list of updates with dates make it easier for the appraiser to give credit. Work done without permits can be discounted or even become a problem for the loan. Here's why unpermitted work matters.
Comparable sales
Comps are the heart of the appraisal. Appraisers look for recent closed sales of similar homes, ideally nearby and within the last few months, then adjust each one up or down for differences. Pending sales and active listings can show where the market is heading, but closed sales carry the most weight.
In neighborhoods with few sales, or with homes that vary a lot, the appraiser may have to look farther away or further back in time. That's when values are most likely to surprise someone. Listing agents can help by giving the appraiser a list of relevant sales and the home's updates when they visit.
When the appraisal comes in low
If the appraised value is lower than the price, the lender bases the loan on the lower number. The buyer has a few options:
renegotiate the price with the seller
cover the gap with extra cash
split the difference
cancel, if the contract still has an appraisal contingency in place
You can also ask the lender for a reconsideration of value if the report has factual errors or missed better comparable sales. Lenders are required to have a process for this. It works best with specific evidence, not just disagreement with the number. More on how the appraisal contingency protects you.
For sellers getting ready
You can't control the comps, but you can make the home easy to value. Take care of visible repairs, make sure smoke and carbon monoxide detectors work, leave access to the attic and crawlspace, and have a list of updates and permits ready. A price grounded in recent sales is the best protection against a low appraisal. If you're selling to buy, ask your lender how an appraisal gap on either side would affect your timeline.
What to do next
If you're buying, decide before you write an offer how much of an appraisal gap, if any, you could cover. A fully reviewed pre-approval helps you plan that cash. When you're ready, search homes across the East Bay.
Questions about an appraisal or a value that came in low? Call or text 925-876-0876, or reach us here.
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