Introduction
A home appraisal is a critical part of the real estate transaction process. An appraisal is an estimate of a home’s market value based on comparable recent sales, the home’s condition, and the state of the local real estate market. Appraisals are typically ordered by the home buyer’s lender once the buyer and seller have agreed to a price and signed a purchase contract.
The appraised value determines whether the buyer’s loan will be approved. If the appraisal comes in lower than the price the buyer has agreed to pay, it creates issues that can derail the entire transaction. Sellers may need to reduce the sale price or make repairs to bring the home’s value up. Buyers may no longer qualify for financing. Therefore, it’s important for both buyers and sellers to understand the appraisal process and how to handle situations where the appraisal is lower than expected.
This overview will explore what exactly home appraisals entail, when they are required, how they impact real estate deals, and how both sellers and buyers can navigate the process successfully to prevent deal-breaking disputes over home value. Understanding the ins and outs of appraisals can help you assess risk, set expectations, and handle negotiations smoothly. When you are finished with this post, check out the full Escrow Process When Selling a Home in Richmond, VA, Opening Escrow, Title Search and Title Insurance, Home Inspection and Repairs, and Real Estate Contingencies.
What is a Home Appraisal?
A home appraisal is a professional inspection and analysis of a property to determine its market value. An appraiser who is licensed and credentialed in the state will visit the home and assess several factors that contribute to its value, including:
– Size of the home (square footage)
– Number of bedrooms and bathrooms
– Layout and floor plan
– Age and condition of the systems (roof, HVAC, plumbing, etc)
– Upgrades and renovations
– Lot size
– Location
– Comparable sales (what similar homes have sold for)
The appraiser will take measurements, photos, and notes about the property. They will search public records about the home and sales data for the neighborhood. Using their expertise, they will analyze this information to come up with an objective opinion of the property’s fair market value.
This appraised value gives the buyer and lender confidence that the home is worth the offered sale price. It protects the lender by ensuring they do not loan more than the property is worth.
When is an Appraisal Ordered?
An appraisal is typically ordered by the buyer’s lender once repairs negotiated during the home inspection have been completed by the seller, but before the closing date.
The lender wants to ensure the value of the home has not decreased since the original purchase agreement was signed. If significant repairs were required, the lender needs to confirm these repairs adequately resolved any issues found during inspection and did not negatively impact the property’s value. ordering the appraisal between the completion of repairs and closing gives the lender an up-to-date assessment of the home’s market value before funds are dispersed at closing.
The timing is important – repairs need to be finished so the appraiser can evaluate the property in its current condition. And the appraisal needs to happen before closing in case the value is lower than expected, requiring the buyer and seller to renegotiate the sale price. Appraisals ordered too early or late in the process defeat the purpose of protecting the interests of both buyer and lender.
Who Orders the Appraisal?
The appraisal is typically ordered by the buyer’s lender once repairs have been made and the deal is nearing closing. The lender wants to ensure that the property is worth the amount the buyer has agreed to pay for it before finalizing the loan.
The appraisal order will come from the lender after the buyer has signed a purchase agreement and is nearing the closing date. Most lenders will not finalize a mortgage loan without a recent appraisal confirming the property value supports the loan amount. So the buyer doesn’t have control over directly ordering the appraisal, but their signed purchase agreement triggers the lender to order it as part of the buyer’s loan application process.
Some key points:
– The buyer’s lender orders the appraisal, not the buyer directly.
– The lender orders the appraisal after repairs are complete and closing is nearing.
– The appraisal is needed to satisfy the lender requirements before finalizing the buyer’s loan.
– The buyer agreeing to purchase the property triggers the lender to order the appraisal on behalf of the buyer.
Why are Appraisals Important?
The home appraisal serves an important purpose in the home buying process – it ensures the property is worth the price the buyer has agreed to pay. When a buyer makes an offer on a home, they make that offer based on certain assumptions about the property’s condition and value. The appraisal provides an objective, third-party assessment of the home’s fair market value.
The appraised value determined by the appraiser protects both the buyer and the lender. For the buyer, it ensures they are not overpaying for the property. Overpaying would put them at risk of being “upside down” on their mortgage, meaning they owe more than the home is worth. This could make it difficult for the buyer to sell or refinance the home later on.
For the lender, the appraisal helps minimize their risk that the borrower will default on the loan. If the borrower defaults, the lender does not want to be in a position of having lent more than they can recoup from reselling the home. So the appraisal gives the lender confidence they are lending an appropriate amount relative to the value of the home as collateral.
Overall, the appraisal provides assurance to all parties that the home’s sale price aligns with its actual market value. This protects the financial interests of both buyer and lender in the transaction.
What Happens if Appraisal is Lower Than Sale Price?
Once the lender orders an appraisal, there are a few possible outcomes. The most straightforward scenario is that the appraisal comes back at or above the agreed upon sale price for the home. However, sometimes the appraisal will come in lower than the price the buyer has agreed to pay.
This puts both the buyer and seller in a difficult position. The lender will not provide financing above the appraised value, so the buyer will need to come up with the difference in cash if they still want to purchase at the originally agreed upon price.
More commonly, the buyer will ask the seller to lower the sale price to match the appraisal. Many sellers will negotiate the price down somewhat to allow the deal to go through, but they are not obligated to drop the full amount.
If the seller does not agree to lower the price enough, the buyer may need to pay the difference in cash or the deal will fall through. The seller also has the option to make repairs and updates to the home that could increase the appraised value. However, the seller would need to pay for these repairs out of pocket before getting reappraised.
Ultimately, a low appraisal introduces an element of renegotiation that can derail settlements if buyers and sellers cannot come to agreeable terms. Both parties need to negotiate reasonably and compromise to finalize the sale when faced with a low appraisal.
How to Handle a Low Appraisal
A low appraisal can put the brakes on a real estate transaction, but it doesn’t have to derail the deal entirely. Here are some tips for negotiating if the appraisal comes in lower than the agreed-upon sale price:
– Ask for a reappraisal:** Appraisals are opinions, not an exact science. Ask the lender if they will order a second appraisal. Perhaps another appraiser will take a more favorable view.
– Offer to split the difference:** If the appraisal is slightly lower than the sale price, consider asking the seller to split the difference and adjust the price somewhat lower. This shows you are willing to negotiate in good faith.
– Cover the gap in cash:** As the buyer, you can make up the appraisal shortfall by agreeing to bring more money to closing. This additional cash investment demonstrates you have skin in the game.
– Ask the seller to cover closing costs:** Sellers can effectively lower the sale price by agreeing to pay closing costs and transfer taxes that are normally paid by the buyer.
– **Request seller to make repairs/improvements:** In some cases, minor repairs and renovations can justify a higher appraisal value. Painting, landscaping or finishing a basement may do the trick.
– Get a second loan:** If there is a significant gap between appraisal and sale price, the buyer may be able to take out a small second mortgage or HELOC to cover the difference.
– File a dispute:** Check the appraisal for factual errors about the property that may have affected the valuation. Dispute these issues with the lender.
Stay calm, flexible and persistent if an appraisal comes in low. With some creative thinking, you can often find an acceptable solution for both buyer and seller.
Conclusion
Appraisals are an essential part of the home buying process. They help ensure that buyers do not pay more for a property than it is worth and that banks do not lend more than the value of the collateral. While a low appraisal can sometimes derail a home purchase if the buyer and seller cannot come to an agreement, this situation can often be navigated with proper communication and a willingness to negotiate.
Overall, appraisals protect both the buyer and the lender by validating that the agreed upon price reflects the true market value of the home. When handled appropriately, appraisals give buyers peace of mind that they are getting fair terms and lenders assurance that loans are secured. With some flexibility and understanding on both sides of the transaction, the majority of deals with low appraisals can still close successfully. By anticipating the possibility of a low appraisal and being prepared to renegotiate if needed, buyers and sellers can ensure a smooth home buying process from start to finish. We Buy Houses in Richmond, VA.
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