What Is a Home Appraisal and Why Does It Matter in Minnesota?
A buyer I was working with in Eagan called me on a Thursday morning with a tone in her voice that fell somewhere between confused and frustrated. She had been under contract on a home for about three weeks. Everything had gone well. The inspection was clean. Her financing was moving along. And then her lender called to tell her the appraisal had come in at twenty-two thousand dollars below the purchase price. “Lesley, I don’t even fully understand what an appraisal is. I thought it was just a formality. How is this suddenly such a big problem?” She is not alone in that assumption. The appraisal is one of the most misunderstood steps in the homebuying process, in part because buyers hear about it but rarely have reason to think carefully about it until something goes wrong. When everything is fine, the appraisal is a document that appears in your file and gets reviewed by your lender without causing any disruption. When it comes in below the purchase price, it suddenly becomes the most important piece of paper in the entire transaction. Understanding what an appraisal is, how it works, what appraisers actually evaluate, and what happens when the number comes in where you did not expect it, is knowledge that serves every buyer regardless of whether their specific appraisal produces a complication. Here is everything you need to know about home appraisals in Minnesota. What a Home Appraisal Is A home appraisal is a professional, independent assessment of a property’s market value, conducted by a licensed or certified appraiser who is qualified to provide an objective opinion of value that meets the standards required by mortgage lenders. When you obtain a mortgage to purchase a home, your lender has a fundamental interest in the value of the property you are buying because that property is the collateral for your loan. If you were to default on the loan, the lender would need to sell the property to recover what it is owed. A lender that lends more than a property is worth has extended credit beyond what the collateral can support, which is a risk the lender is not willing to accept. The appraisal is the mechanism through which the lender obtains an independent, professional opinion of the property’s value before committing to the loan. The lender does not simply take your purchase price as evidence of value. They require a separate, objective evaluation by a credentialed professional who has no financial stake in the outcome of the transaction. The appraiser’s job is to determine what the property would sell for in an arm’s length transaction between a willing buyer and a willing seller in the current market. That determination is grounded in a specific methodology, not in opinion or impression. Who Orders and Who Pays for the Appraisal The appraisal is ordered by your lender, not by you directly. Your lender selects the appraiser through a process that is designed to ensure the appraiser’s independence from both the lender’s loan production team and from the buyer and seller in the transaction. Federal regulations that emerged from the 2008 financial crisis established strict independence requirements for residential real estate appraisals used in mortgage lending. Lenders are generally required to use an Appraisal Management Company that selects the appraiser from a panel of qualified appraisers, rather than allowing loan officers or other parties with an interest in the transaction’s completion to select the appraiser directly. You, the buyer, pay for the appraisal. The cost is typically between four hundred fifty and six hundred fifty dollars for most single-family residential properties in the Twin Cities metro, though it can be higher for larger properties, unusual property types, or rural locations where comparable sales data is more difficult to find. The appraisal fee is typically paid when the appraisal is ordered, not at closing, which means it is one of the early upfront costs of the homebuying process rather than a closing day expense. What the Appraiser Actually Evaluates The appraisal process involves two distinct components that together produce the appraiser’s opinion of value. The first component is the physical inspection of the property. The appraiser visits the property in person and evaluates its condition, size, layout, features, and overall characteristics. They note the property’s square footage, the number of bedrooms and bathrooms, the age and condition of major systems, the quality of construction and finishes, the size and usability of the lot, the presence of a garage, and any other features that affect market value. They also note any apparent deficiencies or conditions that affect the property’s value or its eligibility as collateral for the loan. The second component is the comparable sales analysis, which is the methodological heart of the appraisal. The appraiser identifies recent sales of properties that are similar to the subject property in the same or a comparable market area and uses those sales as the basis for their value opinion. The comparable sales, often called comps, are properties that closed within a recent timeframe, typically the past three to six months, within a reasonable geographic proximity to the subject property, and with similar characteristics in terms of size, age, condition, and features. The appraiser makes adjustments to the comparable sale prices to account for differences between each comp and the subject property. A comparable that has an extra bathroom that the subject property does not have gets a downward adjustment. A comparable that is older and in worse condition than the subject gets an upward adjustment. After adjusting each comparable, the appraiser produces a reconciled value opinion that reflects their professional judgment of what the subject property would sell for in the current market based on the evidence provided by the adjusted comparable sales. The Appraisal Report The appraiser’s findings are documented in a formal appraisal report that is delivered to your lender. The most common format for residential appraisal reports in Minnesota is the Uniform Residential Appraisal Report, sometimes called the FNMA 1004