The Appraisal Process

Appraisers are people who come by, look at a home, and appraise the value for a bank or lending institution. They are an intricate part of the home buying process. Why? Well, the lender needs to know if the property being purchased will have enough value for the collateral on the loan. In other words, if things go bad for the buyer and the lender ends up with the home, they will need to be able to sell it and get back the money they loaned.

So what is the big deal you ask? Well, if the value is determined to be lower than the sales price on the purchase contract, the buyer may have to cover the difference in cash as the lender will only lend on the lower of the contract price or appraised value. So if you are buying a $200,000 home, expect to put down 20% or $40,000 and borrow the rest, you will be unhappy with an appraised value of $190,000. This means you will have to come up with an additional $10,000 in cash. Ouch!

What drives me crazy is that the same home can be appraised by two different appraisers within a week of each other and be $30,000 apart on value. I have seen this happen. The system has lots of subjective decisions built into it that can alter valuations by quite a bit.

So, even though you and the seller agree on a price for a home, the lender may not. Gone are the days where a willing buyer and a willing seller set a price. The lender really has the power to kill a deal based on what they believe the value of the home to be.