What if the Home You are Buying Does Not Appraise?
If the home you are planning on purchasing is unique there may simply not have been many sales of similar homes in the area. In which case, arriving at a fair offer price can sometimes be a challenge.
To arrive at an offer price, your buyer agent should put together an analysis for you of all of the homes in the area that have sold, preferably within a mile of the home and within the past six months. These homes will have a similar square footage and be in the same age range, i.e., a newly constructed home is not a comparable sale for a home that was built in 1952.
But, what happens if your buyer agent does everything appropriately and the house does not appraise?
In a slow or declining market there may not have been many sales of similar homes in the town you are looking in. This factor could definitely have an effect on the appraisal outcome.
As a precautionary measure, I usually put in the offer to purchase that home "must appraise for the sale price." This acts as an insurance policy that the analysis that I have done on the property is accurate. It also gives you as a buyer the option of withdrawing from the transaction if the appraisal comes in lower than the price you have agreed to pay.
Additionally, it gives you some leverage to renegotiate the sale price with the seller. If the seller feels that you can and may walk away there will be some pressure to lower the price to the appraisal amount.
You should keep in mind, however, that no one is infallible and a property appraisal is not an exact science. At best, it is an attempt to determine what the home is worth based on a number of different evaluation methods. This is usually done by the "Sales Comparison Approach" comparing your home with sales of similar properties. This method is subjective since no two homes are exactly alike.
In the event that the appraisal does not come in at the sale price you could get a second opinion. It is possible that the appraiser did not use the most appropriate comparable sales for the home. They could be challenged. A second appraiser may have a different valuation.
If the contract price for the home you are buying is $600,000 and the appraisal comes in at $595,000 does that mean you should walk away? Not necessarily, but with the "property must appraise" phrase contained in the offer you at least have options.
You can decide to proceed with purchase, renegotiate with the seller or choose to get out of the transaction with your deposit refunded.
Copyright 2010 "What if the Home You are Buying Does Not Appraise?"
Claudette Millette, Broker, Owner, The Buyers' Counsel - (508) 881-6230