What Happens At A Home Appraisal?

The process of selling a home is complicated. From finding a real estate agent for representing your best interest to marketing the property to get the maximum possible price, you invest a lot of money, time and efforts in this process. And, when you have finally put the property under contract, an appraiser steps in.

If your buyer is financing the deal with a mortgage, his or her lender will order an appraisal. If the property’s appraised value is estimated by the appraiser to be at or above the purchase price, the deal will proceed to closing without any hiccups. But in case it comes in below the purchase price, you are in trouble. This issue that you may not have even considered at the time of listing your property can cause the deal to fall apart.

Let’s First Get A General Misconception Out Of Way

Most home sellers believe that a home inspection and an appraisal are the same thing, but they are not. While a home inspector tries to discover defects with the property, an appraiser’s primary responsibility is to estimate the value of the property based on its size, location, amenities and condition. Both are licensed professionals. An appraiser may ask for a home inspection if he or she finds a particular defect that needs to be examined for its possible impact on the value.

Why A Home Appraisal Is Conducted

An appraiser’s report is primarily used by lenders. Most buyers take out a mortgage. How much amount of mortgage will be approved depends on the ratio of property’s value to the borrower’s income. It’s called ‘loan-to-value’ ratio.

Lenders order for a home appraisal; however the buyer has to pay for it in most cases. After getting a home appraisal report, the borrower’s mortgage application is processed based on the property’s appraised value.

How Can A Home Appraisal Be A Deal-breaker?

Buyers usually put a financing contingency in the purchase contract. What it basically means is that the closing is subject to the approval of mortgage. If the buyer’s mortgage application is rejected, he or she will be able to get out of the deal without paying any penalties. The escrow amount will be returned to the buyer.

One of the reasons for a mortgage application’s rejection is that the property’s appraised value is lower than the contract price.

Let’s say for example, your buyer agreed to purchase the property for $500,000. He applied for mortgage with a 20 percent of the value down. So he would have to arrange $100,000 for down payment. The lender then orders a home appraisal. The home appraisal report estimates the value to be $400,000.

The lender will approve an 80 percent financing based on this estimate, so the buyer will now have to put $180,000 down.

In that situation, the buyer may back out at the last moment, unable to arrange the extra cash.

Now you have two options:  (1) you have to renegotiate and offer the property for a reduced price or (2) agree to return the escrow amount and put the property on the market again hoping for an offer from a cash buyer who is willing to purchase it for $500,000.

What To Expect From An Appraiser?

Appraisers don’t guess at the value, instead a lot of facts go into their report. Their report includes:

  • A neighborhood map
  • Applicable comparative market analysis (CMA)
  • A sketch of the building
  • The method used in calculating the floor area
  • Images of the building from all angles
  • Any applicable real estate market report
  • Land and title records
  • Tax records

Communicating With An Appraiser

Appraisers are legally required to be independent and unbiased when appraising a property’s value. You or your real estate agent can not unduly influence a home appraisal independent opinion. For this reason, most real estate agents avoid to communicate with appraisers all together. It can be a mistake. Your real estate agent can definitely provide an appraiser with information that helps him estimate the value of the property correctly. The information may include a comparative market analysis (CMA) that is a study of comps or comparable sales in the same neighborhood. You can also bring to his notice any remodeling or repair work you have carried out that you believe may have an impact on the value. You can give this information in writing.

Keep in mind that you or your agency should never indulge in coercing an appraiser to provide a favorable report.

Based on what you read above, here are a few things that will help you be prepared for a home appraisal:

  • Your realtor should be present at the time of home appraisal. An appraiser may need to ask your representative questions about the property’s condition, repairs and renovations that only she or he can answer. If your realtor is not present, he may rely on assumptions.
  • You can have your home appraised independently even before listing it for sale. You can know for sure how much your home is worth. A home appraisal is, however, not required if your agent is experienced and has represented buyers and sellers in your area.
  • You should get a copy of the home appraisal report from the lender with the buyer’s permission. If the buyer’s agree, the lender will provide you with a copy free of cost. You can dispute the report if you believe there are any errors. For example if you believe the appraiser’s choice of properties in your neighborhood for a CMA has been incorrect, you can request your listing agent to provide a CMA which supports the contract price.
  • If you have your own appraisal performed, your realtor can provide a copy of the report to the buyer’s agent.

In conclusion

Don’t let an appraisal report get in the way of a smooth home sale. The best way to avoid any hassles is to put the right price tag on the home when listing it for sale. Here at Delphine Team, we have a team of experienced real estate agents who keep a close tab on the condition of a property’s market and know how different parameters influence a home’s price. We provide homeowners an impartial estimate of the property’s value so that they will know what price range they should sell without paying the appraiser.

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