Picture this scenario in a real estate transaction; pre-approved buyer and seller have agreed on a sale price and terms. Home inspection has been conducted and negotiated. Repairs and credits are inked on paper. There is only one person left to join the party... the Appraiser. These FAQ’s are just what you need to navigate this aspect of the home buying and selling journey.
What is an appraisal?
An appraisal is an estimate of the property’s market value. It’s ordered by an independent 3rd party on behalf of the lender, to protect the borrower from borrowing more money than their home is worth, and the lender from lending more money than the home is worth.
In Pennsylvania, an appraiser is certified by the state to act as fair and impartial through various methods of professional judgment. It is important to remember, an appraisal is not an inspection. Although there can be some overlap, an Appraiser is looking for the value of the property and if defects affect the value and safety of the home per lending guidelines, the appraiser can require repairs on behalf of the lender.
Who’s side are they on?
An appraiser is to remain neutral. To discourage any collusion, your lender orders the appraisal through a 3rd party “management” company. Although you pay for the appraisal, the appraiser cannot have any bias toward the buyer, the seller’s agent, the buyer’s agent, the lender, or the bank. It is their responsibility to make sure the price agreed upon is fair and to ensure the property value is accurate.
What does an appraiser look for?
All 3 bedroom homes are not alike! Imagine you have two-row homes, next door to each other. Both have the same exact layout. One could be deteriorated, in a state of disrepair while the other has been completely renovated with brand new everything. Clearly, they are not going to be the same estimated value in the eyes of the seller, buyer, or the bank.
The appraiser will take a walk around the exterior of the property, note if it is in a rural, urban or suburban neighborhood. They’ll include specifics like square footage and amenities based on a list within a standardized form. They work within very rigid boundaries imposed by organizations like The Appraisal Foundation, “which is the nation’s foremost authority on the valuation profession”.
Once inside they will note the number of beds and baths. Record the condition, test to confirm the utilities are on, and most of the time measure the size of the rooms and square footage of the property. The inspection is fairly superficial and photos are required to be included in the report. Depending on the type of loan, these reports can be randomly audited by the federal government.
What if the appraisal comes in low?
Let’s say as a buyer you were pre-approved by a lender for a loan of $340k. You found an amazing home that was listed for $300k. Due to the hot market, demand is driving up prices, so your offer is accepted at $20k over asking price. The appraisal comes back at an estimated property value of $290k. It is important to understand that the bank that is providing your loan money, is going to lend you an amount based on the loan to value you established and your appraisal value, not your contract price. In this example, the buyer and seller need to work together to figure out how to make up a difference of $50,000.
Option 1: The price of the home remains the same and the buyer needs to either bring $50k cash to the table (think cashing out those stocks or asking grandma for a loan).
Option 2: The buyer and seller work together to negotiate a price that is comfortable for both parties and narrows or eliminates (HA! Wishful thinking in this market) that $50k gap.
Option 3: If the buyer’s and seller’s agents and the lender can build a case that the appraisal is inaccurate, they can go to battle with the appraiser and hopefully convince them to adjust the property value.
Option 4: Decide to switch lenders and request another appraisal. This is not an option for FHA borrowers because the FHA appraisal is recorded on the address and stuck for months. This is also only an option for when real estate agents can establish solid proof that the appraisal is inaccurate.
Option 5: The buyer can provide the seller with a letter of declination from their lender stating that their loan has been declined by the bank. If this is done within the terms and timeframes outlined in the purchase agreement, then the seller can terminate the contract and return the deposit monies to the buyer.
The outcome of an appraisal is very unpredictable. Most of the time when an agent prepares their client for a bad appraisal, it comes in just fine. When everyone is prepared for things to go perfectly, they can flop. Both ways are totally normal. So normal that buyers in today’s hot market are agreeing to buy whether the appraisal comes in at value or not. Or instead of offering over asking, they agree to pay some of the seller’s expenses, like transfer tax, or agent’s commission, etc.
What if the appraisal comes in higher than what we offered?
Wouldn’t it be nice if as the buyer you got a big old check for the difference? That doesn’t literally happen... but in a way you do! It means you made an absolutely excellent choice on a new home at a great price, and that the value of your home is more than you paid for it, right out of the gate! The term for that is “instant equity”.
Still have more questions about appraisals or any other step in the home buying or selling process? We can chat about this ALL day! Give us a ring, shoot us an email, or join one of our homebuyer or home seller workshops. We are happy to help explain the ins and outs of this and all the important steps of the home buying and selling processes.
Saving money for a downpayment and closing costs is the # 1 reason people are holding off on purchasing a home. PHG agent Rachel Shaw came up with a trusty list of some of her favorite homebuyer assistance grants and loan programs. With a little help, your dream of owning a home may not be as far off as you thought!