Understanding Appraisal for Contract Negotiations and Lending

What you don't understand about appraisal can hurt you in the pocketbook!!!

OK. You found the home that you want to buy. Now you need to structure the deal for your best advantage. The appraisal contingency clause in the Northern Virginia Regional Contract which is used in Arlington, Alexandria, and Northern Virginia states that

" This contract is contingent on the purchaser obtaining an appraisal certifying the value of the property to be no less that the sales price....Purchaser shall provide Notice to the seller by the Appraisal Deadline as follows: The appraisal is equal to or greater than the sales price. This contingency has been satisfied and removed.

or

The appraisal is not equal to or greater than the sales price and the purchaser elects not to proceed with consummation of this contract, unless the seller elects to lower the sales price to the appraised value. it will be the sellers option to lower the sales price to the appraised value and the parties shall proceed to settlement at the lower sales price...."

The first clause can cost you dearly if your agent is not knowledgeable about the lending process. Banks lend based on the appraised value, but they do not blindly accept the value in the appraisal. Bank underwriters actually read these reports and look at the comparable Homes chosen by the appraiser. If the underwriter does not think the data works because there are too many adjustments to the values of the Homes, they settled too long ago, or they are too far from the subject property, the underwriter can tell the appraiser to further support the value with additional properties. They can also request a second appraisal. So you do not want this contingency removed until the BANK HAS REVIEWED AND ACCEPTED THE APPRAISAL. To protect yourself the appraisal contingency should be the same length as the financing contingency. If you don't need a financing contingency, DON'T remove the appraisal contingency until the appraisal is reviewed. If the lender says you are approved, that does not mean this step is completed. Get your final mortgage commitment from the Bank and there should not be any conditions pertaining to the appraisal.

The second clause talks about a low appraisal. Before you make an offer on a property it is important to know how your price compares to the recent sold comparables. If your price is below the sold comparables you will not have a low appraisal and will not have an opportunity to shave additional dollars off the sales price based on the appraisal. In essence, the agreed upon contract price will be the price you pay at settlement for the property.

Conversely, if your contract sales price is above the sold properties you will be able to go back to the seller appraisal in hand and get an additional price reduction or you have the option to void the contract. At this point, the property is off the market and the seller is emotionally vested in the upcoming settlement. The seller may have rejected an offer here but will accept the price with the appraisal data. Understanding where you are in this value continuum can open up additional negotiating strategies for your home purchase.

Best,

Debbie Jensen

www.AtHomeWithDebbie.com