THE ART OF APPRAISAL
One of the more unfamiliar aspects of a real estate transaction is the appraisal process. But if there is lending involved, this part is really important!
WHAT IS AN APPRAISAL? A home appraisal is the process by which a licensed appraiser conducts a thorough inspection of a property to assess its value. This is not always the same as the listing price! The appraiser will consider all factors that could affect the property’s value. These factors include recently sold properties of comparable size and condition, of similar year built and with similar features, in the same market area. An appraiser will also consider the condition of the property and any upgrades made by the seller. He will later compile his findings in a report and generate the home’s “appraised value.” The lender is typically the one to order the appraisal. This is done to ensure that the lender is not over-lending – in other words, to protect the lender from loaning more money than the property is actually worth. This is key because lenders base the amount of money that they loan a buyer on the appraised value of the property, not the list price. When the property “appraises,” it means that the property was determined to be worth the amount the buyer agreed to pay for it, or more. This is wonderful news to a lender! But sometimes, a property does not appraise. What happens then? If the home appraises for less than the contracted purchase amount, here is what will likely happen: 1) The buyer will bring the difference to closing in cash; 2) the seller will agree to a lower purchase price; or, 3) the buyer and seller will meet somewhere in the middle. Paragraph 2B of the Third Party Addendum states that both the buyer and property must meet lender approval. Therefore, if the property doesn’t appraise, it’s possible the buyer could get out of the contract entirely on the basis that the property hasn’t satisfied underwriting requirements. BOTTOM LINE There are a lot of moving parts in even a "simple" real estate transaction. Who you choose to work with matters. Knowledge and experience of these sorts of scenarios will help protect you going forward.