Home Appraisal

When buying a home in California, you’ll most likely need to complete a home appraisal and a home inspection. In combination, the two reports provide a wealth of information to you, the homeowner, so you can better understand the value and condition of your home.

In California, the home appraisal report compares the home you’re buying to other recently sold homes in the neighborhood and homes currently on the market. The appraiser is independent of the transaction, which is important because you want a non-biased opinion as to the home’s current value.

The appraiser’s final value is what the underwriter will use to calculate your Loan-To-Value ratio.

What is a home appraisal?

A home appraisal is an independent evaluation of the market value of your home by a licensed real estate appraiser.¹

The appraiser does not work for the lender or the homeowner and is separate from the transaction. The appraiser will provide their findings in an appraisal report called “Form 1004.”² The home appraisal usually takes place after you apply for the mortgage and is in the process while the underwriter reviews your file.

What’s in a home appraisal report?

An appraisal report covers hundreds of key statistics about your home, the neighborhood, and how it compares to other homes in the surrounding area. As mentioned, a home appraisal in California is completed by a fully licensed and insured appraiser. Before we break down some of the important topics and key points of information, let’s cover some of the basics of home appraisal reports;

• The official name of an appraisal report is the “Uniform Residential Appraisal Report“
• Most appraisal reports are on a standard form like Fannie Mae’s 1004 (aka Form 1004)
• All appraisal reports will have the appraiser’s company name, appraiser name, and contact information
• An appraisal report is NOT a home inspection report
• There are three ways to appraise a home – the Value Approach, the Cost Approach, and the Income Approach³
• For most residential mortgages, the Value Approach will be used by the appraiser

Page One Of The Appraisal Report

The first page of the appraisal report will have your personal information, including the property address of the home (aka Subject Property).

Additional information on the first page includes Neighborhood Characteristics, Housing Trends, Market Housing Prices, Age Range, and Land Usage Percentage (in the area). All these items fall under the category of “Neighborhood.”

The next major category on page one of the appraisal report is “Site.” This category covers the dimensions of the land on which the home was built and what utilities are connected to the property. It also states whether the home is in a FEMA Flood Zone.

After that, the next category is “Improvements.”

The term “improvements” refers to the improvement of the land (otherwise known as the building of your home) and upgrades to your home. In this category, you have the General Description, Foundation, Exterior Description, and Interior Description.

In this category, the appraiser can provide written information on the property’s ” additional features, ” including things like special energy-efficient items. There is an area to describe the property’s condition and if there are any physical deficiencies with the property.

Lastly, this section includes an area that states if the property conforms to the rest of the neighborhood.

Additional Pages In the Appraisal Report

Most residential home appraisal reports are twenty to forty pages long (when you factor in the supporting documentation). Here are the most important additional pages within the appraisal report.

• Comparable Sales Page: This is perhaps the most looked-at page since this is where the appraiser compares your home to homes in the neighborhood.
• Cost Approach Section: Most consumers overlook this section, but mortgage lenders and insurance companies review it in detail. This is where the appraiser estimates the cost to rebuild your home, and mortgage companies require you to have enough homeowners insurance coverage to do this.⁴
• Legalese: The bulk of the appraisal report is made up of standard legalese language, which defines the role of the appraisal, what the report covers, and what it does not cover. Scope Of Work, Intended Use, Intended User, Definition of Market Value, Appraiser Certification, and more.
• Comment Addendum: This is an interesting part of the appraisal report in which the appraiser can comment on your property. Here is where the appraiser will give a general description of the property, the quality of construction, and if any “deferred maintenance” is needed.

What Is Deferred Maintenance?

Deferred Maintenance is when the appraiser notes in the appraisal report that the home needs certain repairs that the homeowner has not completed.⁵

The appraiser will provide an estimated cost to complete the Deferred Maintenance in the report. Mortgage lenders usually (not always) require any Deferred Maintenance items to be taken care of before you close your loan.

Items That Might Be Deferred Maintenance;

• Incomplete bathroom
• Broken window
• Missing flooring
• Rotted wood
• Termite damage

The list goes on, but the above gives you a good idea of what might be listed in the appraisal report if there were some issues with the property.

Different Types Of Appraisal Reports

We’ll list the main types of appraisal reports a homebuyer might encounter when they buy a home.

• 1004 – Single Family
• 1004C – Manufactured Home
• 1004D – Appraisal Update or Completion Report
• 1025 – Multi-Family 
• 1007 – Rental market
• 1072 – Condominium
• 203k – FHA Renovation

There are many other reports (for example, vacant land), but the above probably covers 95%+ of all consumer mortgages. So, if you were to buy a Single-Family Home, the appraiser would use form 1004.

If the appraiser includes Deferred Maintenance items in the report, a 1004D report will be needed once the items are fully repaired.

Why do I need a home appraisal?

You need an appraisal because the report will help you and the lender understand the property’s true market value. An appraisal report can confirm if you’re paying a fair price or too much for the property.

If the appraised value is lower, you should renegotiate the selling price with the current owner to ensure you do not overpay for the property.

Also, the appraisal report can point out the following information about the property;

• Significant damage: Appraisers are not trained inspectors, but they usually point out any significant damage they see in the home appraisal report.
• Non-permitted additions: Before an appraiser visits a property, they usually look up what the legally permitted square footage is. This way, they’ll know if there was an addition to the property that was not properly permitted. If so, they usually make a note of the non-permitted addition in the home appraisal report.
• Zoning information: The appraisal report shows how your property is zoned, which can sometimes impact a transaction.

How much does an appraisal cost in California?

A home appraisal in California generally costs between $500 and $800 for a Single-family or Condominium report (some are higher). A property with multiple units, a rental, or a large home will cost more. Typically if the value is over $1,000,000.00, the appraisal fee will be higher unless that value, or near that value, is normal for the immediate area.

If you are buying a multi-unit rental property valued at or over $1,500,000.00, you may end up spending $1,000 – $1,500 for an appraisal. The appraisal fee is paid upfront to the appraiser before the inspection.

The estimated cost of the appraisal is listed in your Loan Estimate, and the final number is listed in your Closing Disclosure.

The best home appraisal tip

This applies to when you refinance your current mortgage. Make sure your home is clean and ready to show at the time of inspection. Throw away the trash, make beds, vacuum the carpets, clean the bathrooms, and make the kitchen shine.

Treat the appraisal inspection as if you are selling the home and highlight the features and benefits the home offers. A successful home appraisal in California depends on how the house looks to the appraiser. It may mean the difference between getting approved and not getting approved.

When an appraiser sees a home that is dirty and/or not well taken care of, they’re more likely to come in on the low side of the value range for your neighborhood.

A home that is clean and ready to show will usually come in on the higher side of the value range. Most appraisers won’t admit that, but it’s something I’ve seen over the years. To be clear, the difference between the two is not going to be huge, but it could be enough to make a difference with your refinance transaction.

Sources:

1. Everything you should know about a home appraisal – Chase.com
2. Fannie Mae Selling Guide – FannieMae.com
3. The Three Approaches to Value: The Cost, Income, and Comparable Sales Methods – Allobarstrategies.com
4. Is homeowners insurance required by mortgage lenders? – Policygenius.com
5. Deferred Maintenance in Real Estate – Retirebetternow.com