Home appraisals are an important part of the real estate sales process when a mortgage loan is required for the transaction. Their purpose is often misunderstood by home buyers and sellers, and it can sometimes provide unexpected complications when the numbers don’t match up. Appraisals are meant to protect the lender, but can also provide some peace of mind for both the buyer and seller. Ultimately, they are a necessary component of getting homes bought and sold in today’s real estate market.
What is a Home Appraisal?
A home appraisal is performed by a licensed home appraiser during the closing process. It is one of the final hurdles that needs to be faced before the transaction can be completed. After the buyers and sellers have agreed on a price and the offer is accepted, the lender will hire a third-party appraiser. Their objective is to provide an unbiased estimation of the property’s current value. They look at the age, size, floor plan, condition, location, comparable sales and multiple other factors to determine an appraised value.
This information is then shared with the lender, buyer, seller, agents and all other parties involved in the transaction. Ideally, the appraisal comes in close to the agreed-upon price. Then, the lender will feel confident in loaning out the required amount. Both the buyers and sellers can feel good about the deal. Unfortunately, it doesn’t always go this smoothly. The appraisal may come in significantly higher or lower than the contract price. In this case, things can get more complicated.
What if the Home Appraisal is Too Low?
The biggest fear for a home buyer is that the home appraisal comes in much lower than the price the buyers and sellers agreed upon—and thus, the amount of the mortgage loan being funded. The mortgage lender may not be willing to fund the loan for the original amount because the property is worth less than the buyer is planning to pay. This may cause closing delays, or could derail the transaction completely.
The good news is there are usually solutions that can be worked out. This is where a good real estate agent can help you navigate this process and negotiate an agreeable outcome for all parties. There are a few options that can be considered at this point:
- Buyer pays more cash to make up the value difference.
- Buyer/agent can request a second look or additional appraisal
- Buyer and seller renegotiate purchase price or other terms of the contract
- Buyer exercises appraisal contingency*, if included in contract
*An appraisal contingency may be included in a real estate contract to protect the buyer. It enables them to walk away without losing their earnest money deposit if the appraisal comes in too low. If there is no appraisal contingency, the buyer can still walk away after a low appraisal. However, they may forfeit their entire earnest money deposit. Your real estate agent will note how to be protected in the sales agreement.
How to Avoid a Low Appraisal
The truth is low appraisals that can seriously shake up the closing process are relatively rare. Still, it’s best for both buyers and sellers to prepare for this potential outcome. Sellers should do everything they can to repair and prepare the property for the best presentation and highest appraisal value. They should be ready to answer questions from the appraiser and provide a list of all upgrades completed (including dates completed).
Buyers need to be thoughtful of the purchase price when making offers. You need to understand that the lender will require a home appraisal and it could cause problems if your offer is way above the property’s real value. If it does come in too low, consult with your Realtor® about solutions and options, including price renegotiations and requests for secondary appraisals. Or, be prepared to pay more cash to make up the price difference if you know you are overpaying for the property and are okay with it.
What if the Home Appraisal is Too High?
This is a much less common scenario, but it can happen. The home appraisal could come in significantly higher than the agreed-upon purchase price. This is great news for the buyer, as they know they are getting a good deal. The lender will be very happy to see this, as well. In most cases, the seller has no recourse here. They agreed to sell at a certain price and the higher appraisal is generally to the buyer’s benefit.
If you have questions about home appraisals or any other parts of the real estate process—or if you are ready to buy or sell a home in the near future—contact The Cyr Team today.