One of the things that make buying a home scary is the fact that there are things outside of your control that can derail a transaction. An appraisal is one of those things. An appraisal is often confused by many as being the same thing as an inspection. While an inspection helps to protect you, an appraisal helps to protect the bank.
A bank will not lend more money on a home than the home is currently worth. Because prices in our area are increasing at such a fast rate, it’s been difficult for appraisers to keep up with those changes and to be able to justify the increases based on previous sales. Each sale in a neighborhood can sell significantly higher than the last.
In a competitive market like the one we are in, offering to pay more money for a home than the listing price or trying to beat out other buyers by increasing your purchase price is a great way to get the home under contract but unless you have cash to pay for a possible difference between that price and the appraisal price, you’re taking a gamble.
How can you be prepared for the appraisal?
Appraisers look at the same market data that your agent does. Your agent should be able to get a fairly good estimate of where an appraisal will come in based on neighborhood comps. When making an offer, an agent should always give an idea of where they believe an appraisal will land based on the data. Unfortunately, appraisers and real estate agents are human and their perspective on the same home can vary widely. My job as the agent is to prepare you for the worst. I will give my opinion on the matter but always remind clients that there’s no way for me to know for sure.
What can go wrong with the appraisal?
There are a couple things that can throw a wrench into a transaction. First is obvious, a home can come in under value. How big of a wrench all depends on your financial situation. I’ve seen appraisals come in a couple thousand under value and some come in $20,000 under value.
Another thing that doesn’t get talked about often but that can cause big issues are work orders. While the appraiser is analyzing the value of the home, they are also looking out for key safety issues and repairs that may be a large expense. This includes the roof (they want to see that it is viable for at least 5 years), chipping paint that may be lead based, deck safety, stair safety, CO2 detectors, etc. If an appraiser sends a list of work orders, the seller will have to decide if they are willing to make the repairs.
What are your options if the appraisal comes in low or has work orders?
If you’re purchasing a home with no money down, you need the appraisal to come in at value to avoid renegotiations with the sellers. If the home comes in below value, the seller may refuse to go through with the deal because they are not willing to lose the additional income. If the owner had multiple offers, they may be hesitant to close on the loan if they think there’s a chance that someone with a larger down payment would be willing to pay the difference.
A common thing for buyers to do is to request closing costs to be paid when making an offer. If the appraisal comes in low, the seller will very often refuse to pay the closing costs in exchange for reducing the price when the appraisal comes in. It’s important to keep this in mind when purchasing a home. If you do not have money for closing costs, there’s still room for negotiation but a low appraisal can make things difficult.
On the flip side, it may be in the seller’s best interest to move forward at the appraised price. The risk of putting the home back on the market after losing may be too great. A home that goes through appraisal and lands back on the market can create a sense of concern for buyers and will reduce demand. They may be risking several more weeks or months on market.
If you are putting down a standard 3-5% or more, you have wiggle room. As long as the home comes in within the amount of your down payment, you can attempt to negotiate with the sellers to see if they are willing to come to the appraisal price but if not, you still have the option of buying the home. In this situation, negotiations can be tough.
Don’t worry. It’s good to prepare but it WILL work out!
I know this doesn’t make most people feel safer when walking through their transaction but it’s good to be prepared. Getting to appraisal can be expensive from the inspection to the appraisal itself. While you will get your earnest money back, that thousand dollars or more can be a tough loss. Understanding this will help when making offers. Appraisal issues are NOT the norm but knowing that they can happen can help to ensure that there are no surprises.
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