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Why Do We Need Appraisals?
While it may be nice to be able to pay cash for a property (especially when the interest rates are high!), most of buyers intend to use a mortgage to purchase their new home. To be approved for a loan, a mortgage lender wants to verify two things. First, the lender will want to know that your finances are strong enough to indicate that you’ll have no problem making the loan payments on a monthly basis. This is done by looking at your credit history, debt, and income levels. Second, the lender will need to know that the property you’re purchasing is of sufficient value to serve as suitable collateral for the loan you’re applying for. What is collateral? Here’s a dictionary definition:
“col·lat·er·al /kəˈladərəl,kəˈlatrəl/ noun
If for some reason you were to default on your loan, the bank will have no choice but to take possession of your property. At that point, the bank will attempt to recoup their losses by selling the property to someone else. This is why it’s so important for the bank to know that the property’s value is high enough. This valuation is done through an appraisal.
What exactly is an appraisal?
An appraisal is a fair market valuation of a property. In this context, it is meant to be an unbiased professional opinion of a home’s value. A professional appraiser is a contracted third party, hired by the lender to provide a professional opinion. There are different requirements in each state for appraisers to be licensed or certified. In Wisconsin, appraisers are required to be licensed, and must also take 28 hours of continuing education during each two-year licensing period (much like Realtors).
The appraiser (almost always) will visit the home observe things like the general condition, the location, the age of the home, the age and quality of various home components (like the mechanicals or the roof), and the design and style of the home. Any improvements made by the owner, particularly the kitchen and bathrooms, will be noted. Evidence of water damage or excess moisture will also be recorded.
When the appraisers visit is complete, an organized report of all these details is generated. Using this report, the appraiser can then compare the home to other properties listed and sold in the neighborhood, adjusting for differences and finally coming up with a valuation for the property.
Who pays for the appraisal?
While the appraisal is ordered by the lender, it is typically paid for by the buyer. The cost is typically between $300 and $450, but can vary from one area to another. The appraisal fee will be added to the closing statement as an item the buyer must pay for.
What happens if the appraisal is below the offered purchase price?
If the appraised value is lower than the offered purchase price, the lender will not agree to provide financing based upon the purchase price. There are several approaches to working around this problem:
- The seller can agree to lower the price to match the appraised value.
- The buyer can agree to increase their down payment (which reduces the size of their loan)
- A combination of these two (compromise and meet halfway for example)
Sometimes, a seller is unwilling to lower the price and a buyer is either unwilling or unable to come up with more cash for a downpayment. Unfortunately, in these cases, it is likely that both parties will walk away from the deal and the property will need to be re-listed. Sellers would do well to remember, however, that finding another buyer may take time, and that there’s not guarantee that the next buyer’s appraisal will be higher (in theory, appraisals should be similar to one another). A seller’s best hope may be to find a new buyer who promises up front to pay over the appraised value, or who is a cash buyer. Since it’s tough to count on finding a buyer who meets these criteria, sellers, should carefully consider their options before making a decision after a low appraisal.
Should I (as a homeowner) prepare for the appraisal?
Although professional appraisers are trained to look past the superficial and concentrate on the core value of a property, the curb appeal and overall cleanliness of the property will increase your chance of getting a better appraised value. If there are any repairs that need to be made, especially ones that are obvious and visible, it may be a good idea to handle them before the appraiser visits. If you’ve made any notable improvements or upgrades to the home, providing a list of them for the appraiser may be helpful.
Sometimes high competition or low real estate inventory will drive offer prices higher than what the recent market would seem to support. If the seller has received multiple offers to purchase the home, resulting in an aggressive purchase price, it may be beneficial to provide these offers to the appraiser to support the value. The saying goes “Something is only worth what others are willing to pay for it.” Showing that several buyers were willing to pay top dollar for the property may help an appraiser justify a higher valuation for your house or condo.
I am a cash buyer, or I’m getting a loan but didn’t include an appraisal contingency in my offer. Can I still have an appraisal?
If a buyer does not have a financing contingency or appraisal contingency written into their offer, but chooses to apply for financing, the offer to purchase form has printed language stating that:
“Seller agrees to allow Buyers appraiser access to the Property for the Purposes of an appraisal. Buyer understands and agrees that this Offer is not Subject to the appraisal meeting any particular value, unless this Offer is subject to an appraisal contingency…”
If a buyer wants to pay separately for an appraisal, but doesn’t intend to finance the purchase, the above language MAY ensure that the seller grants access to their appraiser, but it may be a good idea to insert more bulletproof language into the original offer stating that, while the buyer intends to pay ca
sh, the seller will grant access to an appraiser hired by the buyer and that that appraiser’s report is for informational purposes only.
I’m writing an offer to purchase a property and am worried that the appraised value will be lower than my offer price, what can I do to make my offer stronger?
During strong seller’s market periods, sellers and their listing agents are generally very savvy when it comes to appraisal contingencies, understanding that high offer prices may mean appraisal shortfalls. Buyers who promise up front (in the additional provisions of their offer to purchase) to pay some dollar amount above the appraised value may be given preferential treatment. Buyers and their agents must be careful when writing this language into their offer, and make sure that there are sufficient funds available to cover any shortfall mentioned in the contract. It may also be a good idea to provide the seller with proof of funds demonstrating that enough money is set aside to handle the down payment required, even if the appraisal is below the purchase price.
I don’t agree with the appraiser’s opinion. Can I challenge it?
Appraisers are usually very reluctant to adjust their valuations, but if an appraiser is presented with information that they were unaware of (a home’s feature that they missed, or a unique characteristic of the home they left out of their analysis), it may be worth a shot. Remember to always be respectful and professional with your appraiser if you hope to get anywhere with your appeal.
In Conclusion
An appraisal contingency can be an important protection measure for a buyer when purchasing a home. As with other contingencies, there ways to make it stronger for more protection and there ways to compromise a buyer’s protection to make an offer more appealing. Hopefully the information above will help both buyers and sellers proceed with confidence and understand the nature and value of this important step in the real estate transaction process.
Have questions about appraisals? Let us know! We’d love to hear from you!
