Appraisals are required by almost every lender. An appraisal is done by an independent third party individual who has no interest in the sale of a property.
Appraisals are to protect both the investment made by the mortgage company and the investment made by the purchaser. The appraisal will visit the property and makes notes in regards to the size, rooms and finishing inside the home. The appraiser will then prepare the appraisal based upon comparable sales in the area in the past 6 months to a year. (This time frame may be longer if no other comparables are found.)
What happens after the appraisal? The mortgage company receives a copy of the appraisal and reviews the appraisal to the sale price. If the home appraises for a value higher than the sale price, all is good in the sale. If the home appraises for a value lower than the sale price, there are options. Be sure to check with your Realtor®, as every Agreement to Purchase may have different options.
The first option is the Buyer notifies the seller they want to reduce the purchase price to the appraisal value. Both parties may agree to the price reduction or they can renegotiate. The second option is the Buyer can proceed to closing with the agreed upon purchase price and will have to pay the difference between the purchase price and the appraised value. The third option is the Buyer may terminate the Agreement To Buy and Sell Real Estate and depending on the financing and Agreement the Buyer may or may not forfeit their Earnest Money.