Determining the market value of a property for a mortgage application typically requires an independent home appraisal. Appraisals are usually conducted by a licensed appraiser, who will visit the house and inspect both inside and outside the property.
However, in certain circumstances, appraisal arrangements that don’t require the appraiser to enter the property may be an option. Let's learn more about exterior-only/drive-by, hybrid and desktop/online home appraisals or alternative valuations.
What is an exterior-only/drive-by appraisal?
To understand what an exterior-only/drive-by appraisal is, it helps to understand how home appraisals usually work.
Traditional home appraisals comprise a detailed inspection of both the interior and exterior of a property. A licensed and/or certified appraiser or an appraiser trainee or apprentice, when permitted, will evaluate a range of factors relating to the house, including its general condition, its mechanical systems, its amenities and its location. They may also review any improvements the homeowner has made to the house, together with additional features that potentially affect the house’s value.
While a comprehensive home appraisal is usually required as part of a mortgage application, sometimes an interior inspection may not be feasible. It might be that the house is considered difficult to access or otherwise unsafe. It may simply be that there aren’t enough appraisers immediately available in the area to provide an interior inspection in a timely manner. It may also be that Fannie Mae or Freddie Mac is permitting the use of an alternative valuation for the property and loan transaction. The COVID-19 pandemic significantly drove down the number of interior home appraisals taking place.
So, what is an exterior-only/drive-by appraisal? Unlike a traditional interior and exterior appraisal, the appraiser will only examine the exterior of the property without entering the property itself. Instead, the appraiser will rely on real estate records and other available documents for information about the property’s interior.
Other than this key difference, exterior-only/drive-by appraisals and traditional appraisals follow similar approaches. For example, exterior-only/drive-by appraisals will also consider the price of similar properties that have recently sold or are currently on the market in the area. Reviewing these comparable properties, or “comps,” can provide useful information that may help increase the accuracy of a drive-by assessment.
Pros and cons of exterior-only/drive-by appraisals
There are some potential advantages to exterior-only/drive-by appraisals. Firstly, while the cost of an appraisal may vary by area, exterior-only/drive-by appraisals may be less expensive than traditional appraisals. Secondly, they may prove more convenient. The appraiser doesn’t need to spend as much time examining the property, while the owner doesn’t need to worry about preparing the interior for the inspector’s visit.
One potential concern with an exterior-only/drive-by appraisal is the appraiser may not be aware of improvements that have been made to the interior of the property. If you’re selling a house and hope that your carefully remodeled kitchen or bathroom might raise your property value, an exterior-only/drive-by appraisal may not properly reflect the scale of your investment. Conversely, lenders may run the risk that the assessment will overvalue the property by missing problems with the interior. Basing a loan on the most accurate valuation is the best practice, which is one reason why traditional appraisals remain a requirement for most mortgage applications.
It is important to note that, while it is the buyer who usually pays for the appraisal, it is the home lender that orders the appraisal and determines the appraisal type, but a full interior and exterior inspection is always an option. The type of home lending product you’re applying for may also influence the appraisal options available.
What is a desktop/online home appraisal?
Unlike exterior-only/drive-by appraisals, which include an exterior inspection, desktop/online home appraisals are completed remotely by the appraiser. Instead of a physical inspection by the appraiser, the appraiser relies heavily on a range of information from sources typically accessed over the web. To meet secondary market requirements, however, a lender may also choose to send a non-appraiser. such as a property data collector, for some additional onsite documentation.
Fortunately, many property records are available online. These may range from property tax assessments and registries of deeds to databases of building permit applications and so on. If available in your locale, Multiple Listing Services (MLS), where brokers put information when helping clients sell their homes, may serve as another data source. These listings usually have detailed information about a property’s interior, often including photos and videos. Online home appraisals, or desktop/online home appraisals, will also typically consider similar homes in the area for purposes of comparison.
Desktop/online home appraisals are not to be confused with home value estimators available online. These automated valuation tools apply algorithms to online data sources to arrive at an estimation of a property’s value. Home value estimators are intended to guide homebuyers and sellers as they research their options. They are not the same as a formal home appraisal ordered by a lender and carried out by a licensed professional.
Pros and cons of desktop/online home appraisals
Desktop/online home appraisals may be less expensive and more straightforward to schedule than traditional appraisals. They may also prove helpful when evaluating a portfolio of properties, where the number of properties under consideration means that an online-only approach might be more efficient.
The main drawback of a desktop/online home appraisal is, as with exterior-only/drive-by appraisals, the appraiser may not be aware of improvements that have been made to the interior of the property. Given that the appraiser doesn’t physically inspect the interior or exterior of the property, a desktop/online home appraisal might fail to note damage that potentially lowers the home’s value. For sellers, this also means that any modifications to their property may be less likely to positively affect the appraised value of their home.
Another potential challenge comes from the public records themselves. Data is only accurate if entered correctly, and clerical errors or failures to update information regularly may impact not only the valuation of the subject property but also the selection of comparable sales used in the appraisal process. In cases where there appears to be a discrepancy, the appraiser may contact the listing agent for additional information. This is a common practice in desktop/online home appraisals, typically used for purchase transactions.
What is a hybrid appraisal?
In hybrid appraisals, sometimes referred to as bifurcated appraisals, there is a division of labor: the appraiser examines the available records remotely, while a third-party property data collector is dispatched to document the interior and exterior of the property. This third party is typically a non-appraiser professional who gathers necessary data but does not assess the property. The appraisal itself, based on this collected data and the remotely examined records, is then completed by the appraiser. The exact arrangement can vary from one appraisal to another.
One advantage of hybrid appraisals is that they can free up the primary appraiser to focus on the specialized market-level research needed for an accurate assessment. This may be particularly beneficial in the case of remotely located properties or where there is heavy demand for appraisals in an area.
Exterior-only/drive-by, desktop/online and hybrid home appraisals are all types of home appraisals that your lender may consider under certain circumstances. While alternative appraisal methods gained prominence during the pandemic, traditional full appraisals are still the predominant valuation type for most mortgage applications. Nonetheless, better understanding how the appraisal system works can help you more confidently navigate your journey to home ownership.