When purchasing a home, buyers usually borrow money from a lender to pay for it. A lender must feel confident that they’re lending the amount of money the home is worth or less. So after the home goes under contract, the lender sends a third party appraiser to the home whose job is to professionally inspect and determine the actual value of the home. This person isn't an inspector; he or she isn't looking for damage that you should be aware of. This person is attempting to determine what your home is worth as it is today.
The appraiser might look at recently sold homes in the area, square footage, acreage, number of bedrooms/bathrooms, and other upgrades/assets of the home to come up with a value.
If the appraisal comes in over the pending purchase price, the buyer has automatic equity in their new home and the sale usually moves forward to closing. If the appraisal comes in under the pending purchase price, the buyer then has several options:
Cover the difference in the appraised value and the purchase price in cash.
The buyers and sellers can negotiate a price between the value and the purchase price.
The buyers and sellers cancel the sale.
The buyers request another appraisal (which will delay closing).
If the buyer is purchasing with cash, oftentimes the appraisal is waived because there’s no mortgage lender involved.
There are a few things that Realtors can do to help the appraiser increase the odds that the home will appraise. Meeting the appraiser at the home and sharing specific homes in the area that have recently sold can help. Having a list of updates and pointing them out within the home is important. Recent repairs should also be included.
Buying and selling is not the only time you’ll need an appraiser. If you decide to refinance your home, you’ll likely require an appraiser as well. Most lenders will require an in-person appraisal. Sometimes, especially in the case of a refinance, lenders will allow for a drive-by appraisal (in which the appraiser literally drives by the house to ensure it appears as it does in the tax records) or an automated appraisal wherein an appraiser used proprietary software to gather sales, tax, and other information and come up with a fair market value number. The latter two appraisals will not include upgrades, updates or improvements made to the home.