Here’s a quick guide to Real Estate Appraisals, how they are obtained and the effect they have on both the buyer and seller.
Most appraisals are ordered as a result of a prospective buyer obtaining a mortgage loan. If a lender is going to provide a loan to purchase Real Property, they will insure that the amount of the loan is supported by an estimate in value. An appraisal will provide that estimate of value for a given date and time.
An order for an appraisal of Real Property is triggered by an accepted offer and a ratified contract. Once the Lender/Mortgage Broker receives the contract, they will order the appraisal. The request is sent to an Appraisal Management Company (AMC) who will in turn assign the job to one of their approved Appraisers. It is important to know that though the buyer usually ends up paying for the appraisal, the actual report is owned by the lender. Once the appraisal is completed, it will either come in “At Value” or it will come in low. Rarely do appraisers assign a value that exceeds the contract price. If the appraisal comes in “At Value”, then the transaction proceeds without a hitch. If is comes in low, then one of the 4 following scenarios will take place;
- The buyer can bring cash to the transaction to make up the difference
- The buyer can exercise their right to cancel the purchase, collect their earnest money deposit (EMD) and go find another property.
- The buyer can request that the seller lower the purchase price to the appraised value. Or…
- The buyer and seller can negotiate to “split” the difference.
Knowing this, it is an important consideration for potential sellers to anticipate what their home will appraise for. Usually, competent Listing Agents can provide a list of accurate comparable sales (for the past 90 days) to assist a seller is determining what their property will appraise for. (Note: An agent/broker who either lives in the seller’s market or farms it regularly is much better equipped to provide an accurate estimate since property value can vary from one neighborhood to the next)
While a seller can pay for their own appraisal in advance of them placing their home on the market, it is important to remember that an appraisal is an “estimate of value” for a specific date/time. This value can and most certainly will change 30 to 60 days down the road.
I hope this has provided you valuable information to consider. Remember, if you are buying or selling, spending an hour with me will equip you to confindently move forward!