When you’re in the market to buy or sell a house, getting an appraisal is one of the most important steps. Whether you’re buying your first home, listing your house on the market, or investing in a property using a 1031 exchange, it’s important to understand what an appraisal is, how it works, and why it matters.

What is an appraisal? 

An appraisal is an evaluation of a home’s value. It is performed by a licensed appraiser who does not represent the buyer, seller, or lender so the results are more reliable for everyone involved.

Appraisals are typically required for homes that are financed or refinanced by a mortgage lender. The purpose of the appraisal is to ensure that the purchase price does not greatly exceed the property’s fair market value. 

Appraisers will use similar comparable sales to determine the market value.

An appraisal isn’t required for homes bought with cash, although the buyer might want one to verify that the price is fair. The house may sell faster if the buyer decides to skip the appraisal.  

What happens during an appraisal? 

An appraiser will inspect a home’s interior and exterior to assess its value. The evaluation includes the size of the lot, the number of square feet, and the number of bedrooms and bathrooms, as well as significant upgrades that have been made to the property.

The appraiser will also consider the home’s proximity to schools, public transportation, stores, restaurants, and other local features that add to its value. 

After the on-site assessment, the appraiser will check similar properties that have sold recently in the same neighborhood to compare how the property should be valued.

What is the difference between an inspection and an appraisal?

The biggest difference between an appraisal and an inspection is their purpose. An appraisal establishes a home’s value, while a home inspection looks for problems that may be of concern to buyers before they purchase a property. 

Problems can include structural damage to the roof and foundation, as well as health concerns, such as mold. An inspector can also provide feedback on the quality of the HVAC systems and major appliances.

If problems arise during an inspection, a buyer can ask the seller to make repairs or reduce the price.

There are no mandatory fixes for a seller after a home inspection, however, if the problems are significant enough they could prevent the seller from getting financing for the property.

How the seller responds may depend on contingencies in the initial offer. Find a real estate agent to help you understand what contingencies should be included before you make or accept an offer. 

Why is an appraisal important?

Appraisals are important to the buyer and the seller. Buyers want to make sure they’re getting a good value, and sellers want to make sure they’re getting the most profit from their investment.

The appraisal also provides peace of mind to lenders. They want to make sure they aren’t loaning more money than the property is worth. Should a home be foreclosed, the bank wants to make sure it will recover its losses.

It’s not uncommon for buyers to receive low appraisals if homeowners are selling their houses in a hot seller’s market. That’s because bidding wars for a limited number of properties may drive home prices beyond their appraised values. 

If the appraisal is lower than the agreed-upon sale price, a lender may not approve the loan. There are a few ways to complete the transaction without losing the property. The buyer can make up the difference by providing a larger down payment or asking the seller to lower the price.

In some cases, neither option may be available. If there is an appraisal contingency clause in the offer, a buyer can withdraw the bid and walk away. 

Property owners might also hire an appraiser if they are considering listing it for sale. This is a particularly useful step for someone who is selling their house for sale by owner and does not have knowledge of the local market. 

Who pays for an appraisal? 

The costs of buying and selling a house add up. If you’re the buyer, you’ll have to pay for the appraisal in most cases. It typically costs between $300–$500. Buyers pay for the appraisal at closing, along with other costs.

How should you prepare for an appraisal? 

Preparing for a real estate appraisal is essential.

Start by reviewing previous appraisals conducted on the property. Take special note of things that caused changes to the home’s value. If you’re selling or refinancing, be sure to take care of any problems before the appraiser arrives to increase your home’s value.

Collect informational documents that can impact your home’s value. These include documents from when you purchased the property and the official land survey, which establishes property size. You should also assemble receipts and work orders from improvements you’ve made on the property.

Just like when you’re listing your home for sale, you want it to look its best for the appraisal. Thoroughly clean, declutter, and make necessary repairs. Add some instant curb appeal by mowing the lawn and trimming the hedges.

House flipping is a wholesale real estate investment strategy in which investors buying a fixer-upper renovate it to sell for profit. Properties can range from single-family homes to condominium units, to entire buildings or groups of buildings.

Unlike other real estate investments, which create profit in the long term, house flipping relies on a quick buy-low, sell-high turnaround strategy to protect the investor’s capital investment. For example, an investor might purchase a distressed home in a hot market, renovate, then sell for profit when the home’s value appreciates and capital improves.

Property flipping looks easy on TV — where full renovations appear to happen over a weekend — though it’s not without its pitfalls and risks. Below, we outline a few common house flipping mistakes, but do your due diligence and thoroughly research house flipping before jumping in with both feet.

Skipping a real estate agent

Many flippers believe enlisting the help of a real estate agent will chip away at a profit margin, but research shows that experienced agents typically sell homes for 6% more than those sold without one. That’s a margin large enough to cover almost any broker’s commission.

A budget-friendly real estate broker is an invaluable resource — someone who can answer questions, offer market advice, pull comparative analyses, help you price the property correctly, and market it when it comes time to sell.

Buying an expensive property

Experts recommend purchasing a property for no more than 70% of the property’s after-repair value (ARV), minus the renovation costs. This buffer ensures you have enough margin to make a profit and the budget to make the repairs and upgrades.

For example, if a property’s ARV is estimated to be $200,000 after putting in $15,000 worth of repairs, your purchase price should be no more than $129,500 ($200,000 – $15,000 × .70 = $129,500).

If you can’t reach that price point with the seller, it’s probably not the right property for you. Particularly if you’re a novice flipper, you don’t want to jeopardize your budget or your ability to maximize your profit.

It’s valuable to remember the 70% rule of thumb is a guideline. Plenty of factors can affect your budget and projected profit margin including market fluctuations, costs of materials, or unexpected renovations. But basing your budget on the cost to renovate the home — versus the home’s future market value — will help to prevent you from overspending on the wrong home and eating up your profits.

Blowing the budget

New flippers tend to grossly underestimate expenses. Don’t “guesstimate” or judge the cost of renovations, upgrades, and repairs on your own.

Instead, consult your real estate agent on which improvements are appropriate for the property and the neighborhood and will therefore get you the most return on your investment. Have an experienced and reliable contractor provide estimates for everything from the cost of labor and materials to appliances and permits.

Regularly refer to a working budget to see if you’re on track or if your spending is spiraling. Don’t forget to factor in the fixed costs — mortgage, insurance, property taxes, and utilities — that you’ll be carrying until you sell the finished flip.

Buying too much of a fixer-upper

Homes with major structural damage are seldom good candidates for flipping as you’re unlikely to recoup your expenses after renovating. And some homes simply need too much work to make them a good investment. Focus on properties in established neighborhoods that need cosmetic updates or renovation on one or two rooms.

If you’re planning to do any of the work yourself, be realistic when it comes to assessing your skills, available time and money, and willingness to do the work. If you’re an experienced DIYer and are confident you can install that backsplash, go for it.

But leave jobs that involve electrical, plumbing or anything else that needs a permit or will have to pass an inspection to the pros. This is not the time to learn how to rewire a home from top to bottom from online tutorials. Selling a home with code violations is a big no-no.

Over improving the property

Tempting though it may be to go all out on new appliances and other upgrades, renovating too much may actually hurt you in the long run. If your property is the most expensive house in the neighborhood, it can make it harder to sell — so keep your improvements commensurate with what the market will bear if you want to sell quickly.

Do a reality check to make sure you’re renovating to the neighborhood, and not to your own personal tastes. So if your flip happens to be in a high-end neighborhood, high-end finishes may be called for. Otherwise, choose durable, middle-of-the-road finishes — neither the cheapest nor the most expensive.

Overpricing when it’s time to sell 

House flippers often make the mistake of pricing the property based on how much money they spent renovating it or how much profit they’d like to make. But buyers only care about market value.

Price the property correctly so that it moves quickly. Overpricing can lead to a home sitting on the market for months. And if it lingers too long, carrying those costs will ultimately eat into your profits.Flipping homes can be enormously profitable and rewarding, but it’s not a part-time hobby. There are significant risks to consider before taking on a fixer-upper. Consider partnering with an experienced flipper who’s willing to mentor and educate you before venturing out on your own.