I get a lot of questions about the appraisal process from new investors and homeowners. There are multiple ways to perform an appraisal, based on the property type. For today’s blog, we’ll keep it simple and talk about single-family home appraisals. Single-family appraisals are based on comparable home sales.
An appraisal is a third party valuation of the property. The appraiser is hired by the lender to ensure they are not overleveraged on the property. Meaning they are not lending $500,000 on a home when it’s only worth $450,000. An appraisal is only required when you are getting a loan, but considering you can get an appraisal done for less than $500, I suggest doing one even if you’re paying cash.
1. Get under contract.
Once you are under contract, the lender will order the appraisal. Lenders don’t get to choose the appraiser, so please don’t place the blame on them. They use a third-party company to perform the appraisal.
2. Verify the appraisal is scheduled.
As an agent, you want to verify the appraisal has been ordered right away. It can take time to find an appraiser in certain markets. Right now, many appraisers are doing desktop appraisals, meaning they’re not even visiting the property. They’re simply looking at it online and giving the lender their opinion on the value.
3. Verify the appraisal came back at purchase price.
Appraisers are not incentivized to appraise at a higher price as they are responsible for the final valuation should a dispute arise. For this reason, appraisals usually come back at the contract price or sometimes above.
If the appraisal comes back significantly below the price you were hoping for, here are the things you can do:
1. Request a second appraisal.
Between about 2014-2016 in California, we were seeing this left and right. Appraisals were coming in $50,000-100,000 more or less than we had hoped for. When the gap is this large, I suggest requesting a second appraisal. Often time’s appraisers come from out of the area and may not be familiar with what’s happening in that neighborhood.
2. Go back and negotiate with the seller.
This is a great opportunity to shave some money off of the purchase price. Let’s say you are under contract to purchase a property for $200,000 and the appraisal comes in at $185,000. This means you would have to find an additional $15,000 to bring to the closing table. If the seller really wants to close the deal, and not deal with going back on the market, try and negotiate the contract price down as close as you can get to that appraisal value. Tip for listing agents: If this happens during a transaction, it’s not going to be fun putting it back on the market. You’re going to have a frustrated seller who is unhappy about his house being valued less than he was going to be paid for it. But you need to explain to him that putting it back on the market for another potential buyer may not be the best option. You lose valuable time and any time a home has to be put back on the market, we know agents and buyers always want to know why. Explaining to them the appraisal came back at a lesser value may cause the next offer to be even lower.
3. Bring more money to the closing table.
If you really want the house and the seller is not budging, bring more money to the closing table. This can really hurt your cash on cash return. However, if this is your dream home that you really want, sometimes it’s worth paying a little more out of pocket. You can get gift funds if needed as well.
4. Terminate the contract.
If you can’t seem to find a solution, your only other option is to terminate the contract. Be sure you understand the contract and know if you can get your earnest money back. Depending on the way the contract was written, you may not have the option to recoup those funds. This is very important to consider when writing an offer if you think it may be an issue down the road.
I get this question often from first-time homebuyers. They’re terrified that if this happens, the seller is going to want more money. What they don’t realize is getting an appraisal for an amount above what you are under contract for, means you are walking into equity from day one. The seller has no way to renegotiate because you agreed to go under contract for a certain amount, not the amount the appraisal always comes in at.
Appraisals can be frustrating but remember it’s an important part of the purchase process to ensure you’re not overpaying for the property. If you have any questions don’t hesitate to reach out to me: email@example.com.