If you are buying a home with financing, an appraisal will probably become part of the process. Most buyers know someone will visit the property, but they may not understand what the appraiser is looking for, why the lender needs the report or what it means when the appraisal says the property is being valued “as-is.”

Let’s make it easier to understand.

What is a home appraisal?

A home appraisal is an independent professional opinion of a property’s market value.

The appraiser researches the home, its location, recent comparable sales and current market conditions. Depending on the type of appraisal being completed, the appraiser may also visit the property to observe its size, features and overall condition.

Some of the factors that may affect the appraised value include:

  • The home’s location
  • Square footage
  • Number of bedrooms and bathrooms
  • Lot size
  • Age and overall condition
  • Updates and renovations
  • Garages, pools and other features
  • Recent sales of comparable homes
  • Current neighborhood and market conditions

The appraiser then uses that information to develop an opinion of what the property is worth as of a particular date.

An appraisal is not simply based on the listing price, the amount the buyer offered, a tax assessment or an online home-value estimate.

Why does the lender need an appraisal?

The home serves as collateral for the mortgage. The lender needs reasonable support that the property is worth enough for the loan being requested.

For example, if someone agrees to pay $350,000 for a home, the lender does not automatically assume the property is worth $350,000 just because the buyer and seller agreed on that price. The appraisal gives the lender an independent opinion of value.

An appraisal may also help the buyer understand how the home compares with recent sales in the area. It can be an important piece of information, but it is still an opinion of value, not a guarantee that the buyer is getting a perfect deal.

The appraisal can come in:

  • At the purchase price
  • Above the purchase price
  • Below the purchase price

A value above the purchase price does not normally change what the buyer agreed to pay. A value below the purchase price may require the buyer, seller, lender and real estate agent to discuss the available options.

Is an appraisal the same as a home inspection?

No. This is one of the most important distinctions for a homebuyer to understand.

An appraisal is primarily focused on the property’s value and whether its condition meets the requirements of the applicable loan program.

A home inspection is a more detailed examination of the home’s physical components. An inspector may evaluate areas such as:

  • The foundation
  • Roof
  • Plumbing
  • Electrical system
  • Heating and air conditioning
  • Appliances
  • Windows and doors
  • Signs of moisture, damage or other concerns

An appraiser may notice an obvious problem, but the appraisal should not take the place of a professional home inspection.

Think of it this way: the appraiser is helping determine what the property is worth for the mortgage transaction. The inspector is helping the buyer better understand the condition of the home they are purchasing.

What does “as-is” mean on an appraisal?

When an appraisal is completed “as-is,” the appraiser is estimating the property’s value in its current condition as of the appraisal date.

This does not mean the home is perfect.

It also does not mean the appraiser guarantees that nothing is wrong with the property. It generally means the appraised value is not being made subject to a specific repair or improvement being completed.

A home can have normal wear, older finishes or minor cosmetic issues and still be appraised as-is.

For FHA financing, for example, certain existing properties with minor deficiencies or normal wear may be appraised as-is when those items do not affect the home’s safety, security or soundness. Cosmetic items still need to be considered when the appraiser evaluates the property’s overall condition and value.

What does “subject to repairs” mean?

An appraisal that is “subject to repairs or alterations” is different.

This means the appraiser’s final opinion of value assumes that certain listed repairs or improvements will be completed.

The report might identify an issue involving:

  • Safety
  • Structural soundness
  • Security
  • Incomplete construction
  • Damage that affects the property
  • A loan-program property requirement

The repairs may need to be completed before closing. Afterward, the lender may require documentation, photographs or a completion inspection confirming that the work was finished.

The appraiser may return to the property, although some situations may allow other approved methods of confirming completion. The exact process depends on the loan program, lender and type of repair.

What does “subject to completion” mean?

This is commonly seen with new construction or a home that is still being renovated.

The appraisal may be based on plans and specifications showing what the finished property is expected to include. The appraiser provides a value based on the assumption that the construction will be completed as described.

Before the loan closes, the lender will generally need acceptable evidence that the property was completed.

What if the appraiser recommends another inspection?

An appraiser is not expected to be an expert in every construction, environmental or mechanical issue.

If the appraiser observes something that could require additional evaluation, the report may recommend an inspection by a qualified professional. This could involve a roofer, engineer, electrician, plumber, foundation specialist or another appropriate expert.

The lender will review the appraisal and determine what additional documentation or action is required. With FHA financing, the appraiser reports observed deficiencies, but the lender ultimately determines which repairs are required.

What happens if the appraisal is lower than the purchase price?

A low appraisal does not always mean the transaction is over, but it does mean everyone needs to review the numbers.

Depending on the purchase contract, loan program and available funds, possible options may include:

  • Asking the seller to reduce the price
  • Renegotiating other parts of the transaction
  • The buyer paying some or all of the difference
  • Restructuring the financing
  • Providing relevant information for a reconsideration of value
  • Canceling the transaction when permitted by the contract

A reconsideration of value is not simply a request for the appraiser to increase the number. It should identify a possible factual error, overlooked information or relevant comparable sale that may affect the appraisal.

How can an appraisal help a buyer?

Although the appraisal is primarily obtained for the mortgage transaction, it can still provide useful information to the buyer.

It can:

  • Offer an independent opinion of market value
  • Show how the property compares with recent nearby sales
  • Identify certain visible condition concerns
  • Help prevent the financing from being based on an unsupported value
  • Give the buyer another opportunity to review the property and transaction

However, an appraisal should be viewed as one part of the process. It does not replace a home inspection, title work, insurance review, survey or the buyer’s own research.

The simple takeaway

An appraisal helps the lender understand the property being used as collateral and gives the buyer an independent opinion of its market value.

“As-is” does not mean “nothing is wrong.” It means the value is being reported based on the home’s current condition without making that value dependent on specified repairs.

If the appraisal is subject to repairs, completion or another inspection, that does not automatically mean the home cannot be financed. It means we need to understand the condition, the loan requirements and what must happen before the transaction can move forward.

If you receive an appraisal and the language is confusing, ask questions. I can help you understand what the report means for the loan, what still needs to be completed and what the next step may look like.

Talk with me about your appraisal or next step.

Related reading

Official resources

Every property, appraisal and loan program is different. Property requirements and available options depend on the lender, loan program, appraisal findings and individual transaction. This article is for general educational purposes and is not a commitment to lend.