Who Pays for Appraisal on New Construction?

A home appraisal in new construction is a professional, third-party valuation of a newly built property. This assessment is a necessary step in the home-buying process, especially when a mortgage is involved. Its purpose is to assure the lender and buyer that the property’s value aligns with the loan amount, establishing adequate collateral. The appraisal helps mitigate risk for the lender by confirming the property’s market value.

The Role of an Appraisal in New Construction

An appraisal for new construction homes evaluates the property’s market value. Lenders require this to ensure the loan amount does not exceed the home’s actual worth, which impacts the loan-to-value (LTV) ratio. For example, a lender might approve loans with an LTV of 80% or lower, meaning the loan should be no more than 80% of the appraised value. This valuation protects the lender’s investment.

New construction appraisals can occur after the home is completed or while it is still under construction. For unfinished homes, appraisers often conduct a “subject-to” appraisal. This estimates the property’s value based on its hypothetical condition once construction is complete, utilizing blueprints, specifications, and a cost breakdown. After construction, a certificate of completion may be required, where the appraiser verifies work aligns with original plans and provides a final valuation.

Appraisers use various methods to determine a new home’s value. The cost approach assesses land value combined with construction materials and labor, common for new builds. They also consider comparable sales, analyzing recently sold homes with similar features and square footage to determine market value. This comprehensive approach ensures an accurate valuation.

Primary Responsibility for Appraisal Costs

The homebuyer typically pays the appraisal fee in new construction. This fee is a standard component of the buyer’s closing costs, which are expenses incurred to finalize the real estate transaction. These costs generally range from 2% to 5% of the home’s purchase price. The appraisal fee is a lender-mandated expense, assuring the financial institution the property serves as adequate collateral for the mortgage.

The appraisal fee varies based on the property’s location, size, and complexity. On average, costs for a single-family home typically range from $300 to $800. Larger, more complex, or remote properties may incur higher costs. This fee is often collected upfront by the lender or rolled into closing costs at settlement.

Payment for the appraisal is necessary because lenders only finance a loan up to the property’s appraised value, not the contract price. Even with pre-approval, the final loan amount is based on the lesser of the purchase price or appraised value. Securing an appraisal is a crucial step for buyers to obtain mortgage financing.

Negotiating and Shifting Appraisal Costs

While buyers typically pay the appraisal cost, this responsibility can be negotiated. Builders, especially in new construction developments, may offer incentives like covering part or all of the appraisal fee. These incentives reduce the buyer’s out-of-pocket expenses at closing. Buyers should inquire about such promotions, particularly if using the builder’s preferred lender, as this can lead to waived fees or credits.

Seller concessions can also cover appraisal costs. In competitive markets or to facilitate a sale, a seller might contribute towards the buyer’s closing costs, including the appraisal fee. These arrangements are part of the negotiation process and should be clearly outlined in the purchase agreement. Such agreements deviate from standard practice and reflect specific market conditions or negotiation strategies.

These instances are exceptions to the general rule. Any agreement for the builder or seller to cover appraisal costs must be explicitly documented in the sales contract. Without such a provision, the buyer remains solely responsible for the fee. Negotiating these terms upfront can provide significant savings and clarify financial obligations before proceeding with the home purchase.

Financial Implications of Appraisal Results

The appraisal’s valuation carries significant financial implications for the homebuyer. If the appraisal comes in lower than the agreed-upon purchase price, it creates an “appraisal gap.” Lenders base the maximum loan amount on the appraised value, not the contract price. For example, if a home is contracted for $450,000 but appraises at $430,000, the lender will only approve a loan based on the $430,000 valuation.

When an appraisal gap occurs, the buyer faces several choices. One option is to cover the difference between the appraised value and the purchase price out of pocket, increasing the down payment. Another approach involves renegotiating with the builder or seller to lower the purchase price. Builders may adjust the price or offer additional incentives to ensure the sale.

If negotiation fails and the buyer cannot cover the appraisal gap, the purchase agreement might be terminated. This is especially true if an appraisal contingency was included, allowing the buyer to withdraw without penalty if the home does not appraise for the purchase price. Without such a contingency, withdrawing could result in forfeiture of earnest money. Buyers may also challenge the appraisal or request a second, though this involves additional costs.