Your home is often your most valuable asset. It’s not only a place where you and your family can congregate and enjoy your time together; it’s also an investment.
But over the years, things change. Perhaps you want to either refinance your mortgage at a lower rate or sell your home to make a profit. Or maybe you’re not yet a homeowner and are trying to purchase a house.
Before applying for refinancing, listing your house on the market, or buying a house, you’ll need to get a home appraisal. This is an important assessment of a property’s value, which matters to all parties involved: you, your buyer (if you’re selling), and a lender.
What Is a Home Appraisal?
A home appraisal is an objective and professional analysis of a home’s value. An appraisal aggregates an array of information including details on the home itself (the floor plan, amenities, and how big it is), a visual inspection, real estate trends in your area, and how much nearby homes in your area sold for.
Generally, an appraisal will be completed when someone is buying, selling, or refinancing a home. It will tell a homeowner whether or not the price they’re putting on the home is fair based on the condition of the home, its amenities, and its location.
Home appraisals will let those buying a home know if a home is a good price. (This can be especially reassuring for first-time homebuyers, who are new to the whole process.)
If you think it’s time to refinance and are getting an appraisal done, it shows the home mortgage lender that you, the borrower, aren’t receiving more money from them than the home is actually worth. The lender wants to know that they are loaning funds to a property that is holding the stated value.
According to a National Association of Realtors study from January 2022, appraisal issues led to 20% of real estate contract delays, so it’s important to get the appraisal right the first time around. That’s an important step in selling your home fast.
How Much Does a Home Appraisal Cost?
The home appraisal cost is typically several hundred dollars, and the borrower will most likely be responsible for paying it. Most people can expect to pay between $300 and $450 for a home appraisal, but it could be higher depending on the specific property.
Some examples:
• If the property contains a pond or lake, you can expect the home appraisal cost to be more.
• If the appraiser is inspecting a larger home and/or a bigger overall property, then the home appraisal cost will go up. The same applies to jumbo loans, which are usually given to borrowers purchasing big luxury homes.
It’s worth noting that there are a few cases in which the seller will cover the cost. These include the following situations:
• If a homeowner wants to get an appraisal and see what modifications they can then make to increase their home value when they’re ready to sell it, they would pay for it.
• If a homeowner is going to sell their home to a family member or friend, an appraisal can help ensure that the parties involved are getting a fair price.
The cost of a home appraisal covers things like the appraiser’s training, licensing, insurance, and expertise. It also covers the time it’ll take for the appraiser to assess nearby sales and market trends as well as conduct a visual inspection.
You’re paying for the appraisal report (more on that in a minute), which will show how the appraiser came to their conclusion on the price and information about your home.
At the end of the appraisal, if it comes up lower than the amount for which you want to refinance or sell it, then you may need to work out a new deal with your lender or purchasing party. That topic is explored in more detail below.
What Is the Home Appraisal Process?
The appraisal process may seem complicated, and you may wonder about how long a home appraisal will take and how deeply your home will be scrutinized. Fortunately, trained appraisers will be able to explain and guide you through every step. But it’s worthwhile to keep reading so you can be ready and prepare a bit. Some points to know:
• Generally, if a home is being sold, the appraisal happens after an offer on a house is accepted and within a week after an inspector has toured the home. Sellers have the option, should they wish to pay for it, to do a pre-listing appraisal so they have more information and are better prepared for negotiations.
• In most cases, the mortgage lender will seek out a third-party appraisal management company to come up with an objective analysis of the home and the appraisal estimate. The lender will determine the cost of the home appraisal, with the borrower usually being responsible for covering the expense.
Next, how long does a home appraisal take? The actual on-premises inspection appraisal can take between one and three hours, depending on how big and complex the home is. Here’s how it typically goes:
• The appraiser will usually bring a form to collect information about the home including things like measurements, nearby housing trends, the demographics of the neighborhood, the condition of your home, and how it compares to other properties in your area. (Some of this is research the appraiser will do back at their desk.)
• The appraiser will also review things like the home’s location, quality of construction, parking situation, exterior condition, its age, its structure, the quality of the siding and gutters, and the square footage.
• They will also research the appliances and mechanical systems, health and safety factors, the number of bedrooms and bathrooms, and the code compliance throughout.
• The appraiser will usually take photos of the home as well as make notes. If you are the homeowner, try to avoid getting in the way when the appraiser is taking photos or interrupting them while they’re working.
• The appraiser may ask questions about what has been done with the home to get a more accurate report. If the homeowner doesn’t want to be there for the appraisal, the real estate agent you’re working with can fill in to answer questions that may come up during the appraisal.
After the appraiser finishes, they’ll put together a report. This involves research into pricing and home values in your area, as well as prevailing market trends. The appraiser may need to check that you had permits to make upgrades, which could delay the process. Typically, however, the finished product is delivered within a week to 10 days.
The report is usually about 10 pages long, but it could be longer if a property is large or complex. It will show details about the home as well as local properties that are similar to it. Here’s how its content could impact your sale:
• If the appraised value is around the same price as listed, then the sale could close shortly after that.
• If it’s lower than expected, it may be necessary to get in touch with the lender to see if a mortgage will be approved. Keep reading for more details on this scenario.
What If an Appraisal Comes in Low?
If the appraisal comes in low versus what you think your home’s value is, you likely want to dispute that in some way. One option could be to print out a list of similar homes in the community and show that they were valued at a higher price than your home.
You may have the option to appeal the appraisal, but note you’ll likely need to support your argument and the appraiser may not change their appraisal. If you are working with a Realtor, they may be able to provide examples of comparable homes being of higher value.
Each lender may have different criteria for formally disputing an appraisal, so should there be an issue, contact the lender to review their policies. In most cases, only the lender can request a second appraisal.
What if the appraisal is low but you don’t want to dispute it? In this case, if you might negotiate with the buyer, seller, or lender. They may be flexible on the price; all you have to do is ask.
Home Appraisal Checklist
Before getting a home appraised, there are a few things you can do to help the process go smoothly.
1. Declutter. While messiness shouldn’t impact the value of your home, if you get rid of clutter (perhaps donate to a local charity, Goodwill, or thrift shop), the appraiser can do their job more easily and quickly.
2. Clean. Thoroughly clean the inside and outside of the home, including the yard. Break out the cleaning supplies or hire a professional cleaning team. It can improve the overall impression of a home’s condition.
3. Make minor repairs. It’s also a good idea to repair any cracks in the wall, paint over paint that is peeling, and make any other visual repairs that may need attention.
4. Check fixtures and appliances. Test the lights, faucets, ceiling fans, and security system, as well as confirming that the windows and doors open and close easily. Run appliances like the oven and dishwasher as well to guarantee there are no problems.
5. Think curb appeal. The exterior of your home is among the factors that affect property value. Consider trimming hedges, getting rid of cobwebs, cleaning the gutters, pulling weeds, and mowing the lawn. Adding plants or flowers could help, too.
Worth noting: Since the appraiser will be walking outside, avoid watering the grass on the day of the appraisal. This can help avoid mud or dirt being tracked through the house.
6. Plan for pets. If you have pets, consider putting them in a designated room or taking them to a family member or friend’s home during the appraisal.
7. Wrangle upgrade info. If possible, make a list of all the upgrades that have been completed on the home and attach permits and receipts detailing how much it all cost.
The Takeaway
Whether you’re buying, selling, or refinancing a home, a home appraisal is a key part of the process. Knowing what to expect can help ensure the process goes as smoothly as possible. It’s also a good idea to understand the factors that go into an appraisal so you can be prepared if the results are not in the range expected.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Can real estate help you retire early?
While people have been retiring early since there was work to shirk, the “FIRE movement” went mainstream in the early 2010s, popularized by Mr. Money Mustache and a few other bloggers.
But does financial independence necessarily mean retiring early? How do you achieve financial freedom? And what hidden pros and cons of FIRE are you probably overlooking?
Here’s your 30,000-foot view of financial independence and early retirement, plus a formula to achieve it.
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FIRE is an acronym for financial independence/retire early, or alternately financial independence/early retirement.
But those actually represent two distinct concepts. Early retirement refers to quitting your career job, never to return to the workforce. Or at least not to a high-stress, high-income career.
Increasingly, some retirees blur the line and continue working a fun job either full- or part-time. But more on that later.
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Financial independence, sometimes called financial freedom, means being able to cover your living expenses with passive income from investments. In other words, your day job becomes optional, and you no longer need to trade time for money.
For example, say you live on $4,000 per month.
You buy a rental property that generates you $500/month in rental cash flow. You like seeing that extra $500/month come in, so you buy another property, and then another. When you have $4,000 of rental cash flow coming in each month, you can live on the rents alone. You could quit your job in a blaze of glory if you liked.
Note that the term “financial independence” has two different meanings, depending on the context. Aside from the financial freedom definition, it sometimes also means the ability to pay your own bills as an independent adult. Thus, a stoner 24-year-old who spends his days playing video games in his parents’ basement and barely working is not financially independent in either sense.
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You get the gist: with enough passive income, you can pay your bills and stop working if you want.
But what should you invest in to reach financial independence and retire early? How much of a nest egg do you need?
Honestly, these are the easy parts of financial independence and early retirement. Easy enough that I can explain them in a few paragraphs.
The hard part is maintaining low living expenses and a high savings rate, month in and month out.
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As outlined above, you can invest in rental properties to generate passive income. And in doing so, you can bend, if not break entirely, the 4% Rule (more on that momentarily).
But as much as we love rental income around here at SparkRental, it’s far from the only type of passive income. You can earn passive streams of income from stock dividends, bonds, real estate crowdfunding investments, and countless other sources.
Rather than trying to pile all your money into one asset class, and earning all your passive income in one way, aim to create many passive streams of income.
For example, I earn money from rents, but also from stock dividends, real estate crowdfunding investments, private notes I’ve lent, and from businesses I own. No one source of my income would blow your mind, but they add up.
If you’re new to investing, I recommend starting with stock investing through a robo-advisor like Acorns or SoFi Invest. It requires no skill on your part, you can automate it, and you can start building an investment portfolio with $10.
When you’re ready for the next step of diversification, add a real estate crowdfunding platform like Fundrise or Groundfloor. It’s equally easy and passive, no expertise or work required.
Only consider buying your first rental property when you’re ready to pick up a new set of skills, and to devote lots of hours to it outside of your day job.
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As outlined above, financial independence requires covering your living expenses with passive income. It doesn’t require an exact net worth.
Still, traditional financial planners tell you to save up 25 times your annual spending (not your annual income!). That’s because financial planners consider 4% a safe withdrawal rate: if you pull 4% out of your retirement portfolio in the year you retire, then adjust that upward each year for inflation, your net egg should last you at least 30 years. Financial advisors refer to this as the 4% Rule.
But if you retire at 40, you need your nest egg to last you 40-60 years, not 30. In that case, a 3.5% withdrawal rate should let your nest egg keep growing forever (see this explanation from CFP Michael Kitces for the math). Rather than multiplying your annual expenses by 25, multiply it by 28.6 to reach your target nest egg for early retirement.
Note that withdrawal rates only apply to your stocks and bonds, not your real estate investments. Your real estate generates ongoing income, with no need to sell off assets.
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Most people who reach financial independence don’t actually stop working. Oh, they may quit their high-octane career job. But there are only so many days in a row you can sip margaritas on a beach before you get bored and fat.
Rather, most people simply switch to a new career that fulfills them. It may not pay well, but that doesn’t matter when you reach financial freedom. Some people start blogs or online businesses, such as travel blogs documenting their adventures. Others work for nonprofits, changing the world for the better. Some focus on writing novels, or painting, or other artistic endeavors.
But because you won’t actually stop working, you probably won’t stop earning money. You’ll just earn less than you do today — which means you don’t need to cover all of your living expenses with passive income. You just need enough to bridge the gap between what you spend and how much your dream job pays.
For example, imagine you spend $70,000 per year while working a soul-sucking job. You dream of becoming a travel writer, but that only pays $55,000. You don’t need $70,000 in passive income to quit your 9-5 job — you just need $15,000 per year, to supplement the income from your dream job.
You may not technically be financially independent, but who cares? You still get to live the same post-FIRE lifestyle without having to meet the full definition of financial freedom.
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To reach financial independence and early retirement fast, cut your living expenses as low as you can. Not only does that boost your savings rate, allowing you to funnel more money into investments, it also lowers your target passive income and nest egg. Remember, for every dollar you spend in retirement, you need $25 invested (or $28.60 if you plan to retire young)!
For maximum savings in a single move, try house hacking to score free housing.
Automate your savings with a robo-advisor, or by setting up automatic recurring transfers.
When you’re ready to expand into rental properties, read up on down payment hacks to buy a rental property with no money down. But beware of using too much leverage in real estate investing, it can leave you with negative cash flow.
You’ll be surprised how quickly your investments take on a life of their own and start generating passive income. Avoid lifestyle creep as your income rises, and keep funneling your returns and passive income back into new investments.
Honestly that’s where the challenge of financial independence and early retirement lies: not in the math or investment strategies, but in the discipline of keeping your living expenses low and your savings rate high.
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The FIRE lifestyle of low living expenses and high savings comes with some surprising perks.
To begin with, recessions are less scary. As you earn more passive income, you rely less on your 9-5 job to cover your bills. If your job disappears to a recession, you can cover many of your bills with rental income, dividends, and other passive income sources.
That same lower dependence on your day job puts you in a better position to negotiate a higher salary or benefits. You can push hard because you’re less daunted by the idea of aggravating your boss. Your world wouldn’t end if you lost your job.
Those negotiated benefits could include working remotely, allowing you to move somewhere with lower cost of living. I live in Brazil for example, allowing me to live a luxurious lifestyle on relatively few US dollars each month.
You may not need life insurance or long-term disability insurance. Low living expenses and a high savings rate means your family could probably survive on one income, if one partner shuffled off this mortal coil.
While many young adults complain that student loans prevent them from investing, living a frugal lifestyle while paying them off makes it easy to keep that “extreme savings” going. You can just start funneling that money into passive income streams and retirement savings rather than student debt.
Read up on other hidden benefits of the FIRE lifestyle here.
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Haters gonna hate — and the FIRE movement has plenty of haters.
Some say it involves too much sacrifice, that people pursuing FIRE save for the future at the expense of the present. As someone who saves 65% of his household income and spends months out of the year vacationing abroad, I can tell you firsthand that’s a bogus criticism.
The woke crowd might retort:
“Yeah but you’re a 40-year-old white male who owns an online business, you probably earn a boatload of money.”
I can assure you I do not. It took years for SparkRental to turn a profit, and even today we reinvest most of our profits back into the business. You know, doing evil things like hiring people and creating jobs.
To this day, my family lives almost entirely on my wife’s modest teacher salary.
Some whine that only married couples can achieve financial independence and early retirement. Others claim only single people can do it, citing marital disputes over money. They can’t both be right, but they can both be wrong.
Others worry about health insurance without employer coverage. Good thing you have so many health insurance options for early retirees.
Everyone has an excuse why they can’t build passive income and retire early. Most of them just don’t want to cut spending for a more frugal lifestyle — and there’s nothing wrong with that. By all means, live the normal suburban life keeping up with the Joneses. Just don’t tell me it’s impossible for middle-class people to retire at 40, because you’re wrong. Look no further than the Thompsons, who retired at 30.
Read the full list of FIRE movement criticisms, and the counterarguments from people actually living the FIRE lifestyle.
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Love it or hate it, the FIRE movement proves that not everyone has to work the standard 40-year career. Some work for 10-20 years, invest a high percentage of their income, then reach financial independence and early retirement.
I plan to work forever — doing things I love. That includes writing, building lifestyle businesses, and perhaps working in the wine industry.
And the more passive income I earn, the less I worry about how much I earn from active income.
This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org
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