Myths Vs. Facts About Home Appraisals


Appraisals are almost always a part of a real estate transaction, but many buyers and sellers often have misconceptions about what they are and how they’re carried out. Even those who have some experience buying and selling in the past may still be misinformed about appraisals.

Here are some of the most common myths about appraisals, from the standpoint of lenders, borrowers, sellers, and real estate agents, and borrowers.

Myth #1: Home Inspections Can Take the Place of Appraisals

Some buyers may be under the impression that a home inspection can determine the value of a property in addition to its condition. While the latter is certainly true, the former is not. Home inspections are conducted to uncover any possible issues with the property that may need attention before a deal closes, but they do not determine property value. That’s where an appraisal comes into the picture.

The fact is, appraisals and home inspections are certainly not the same thing, nor do they perform the same function. And while home inspections are optional (although highly recommended), appraisals are typically required by the lender.

Myth #2: All Upgrades Add Value to a Property

The truth is, not every type of improvement necessarily boosts the value of a home. Unfortunately, many homeowners are under the false impression that they will recoup every dollar spent investing in renovations. In turn, they may assume that their home is valued higher than what it actually is.

In fact, certain types of upgrades provide a poor return on investment. More specifically, projects that “over-improve” a home according to the surrounding neighborhood can actually lower its value. If the upgrades do not match the standard in the area, they will be considered excessive and will result in an appraisal that’s lower than what may be expected.

Myth #3: There’s Nothing a Buyer Can Do if an Appraisal Comes in Low

Getting a low appraisal is not something you would have wanted, but all is not lost just yet. If your appraisal comes in low, you have some options.

For starters, you may request to have another appraisal done by a new appraiser. While these professionals are highly trained and accredited, there may be the odd time when errors were made in bad judgment, or inadequate data was used to make accurate calculations. Buyers and their real estate agents are highly encouraged to review the appraiser’s report carefully to confirm the accuracy of the information contained within it. If errors are discovered, you may request to have another appraiser brought in (at your expense) to see if a different value for the home is determined.

You may also renegotiate with the seller for a lower price based on the lower appraised value of the home. If done right, the appraisal will be an accurate indication of the current market value of the home. If the appraised value comes in lower than what was agreed to purchase the home for, obviously the sale price is too high, in which case you have proof to show the seller during the renegotiation process.

Myth #4: Appraisals Are Optional

If you are applying for a government-backed mortgage, such as an FHA loan or VA loan, then an appraisal is a mandatory part of the mortgage process. Without an accurate appraisal, your lender will likely not approve you for the loan amount requested. Just about every federal agency that deals with insuring a mortgage requires a home appraisal.

However, appraisals for mortgages that come from private lenders for non-government backed mortgages are typically optional. Having said that, it would be challenging to find a lender who would be willing to take the risk of extending a home loan for a property that has not been appraised. If they offer loans for well over what a home is actually worth, they will be placed in a vulnerable position should the borrower default on the mortgage. In this case, the lender would not be able to recoup the investment upon selling a foreclosed home.

The Bottom Line

Like any other component of a real estate transaction, it’s very helpful that you understand the appraisal process. However, appraisals are often an infrequent experience for the majority of first-time buyers, who may then have some misconceptions about the process and the inevitable results. Be careful of what you hear about appraisals and any other part of the real estate process, and instead let your real estate representative provide you with factual information.