A home appraisal is a common, critical step in the home buying and selling process, and it’s one that could make or break the deal. It’s important to know how an appraiser makes an evaluation, and how the outcome of an appraisal could affect your strategy in a real estate deal.
What is an appraisal and why is it necessary?
Simply, a home appraisal is an expert opinion of a home’s value. For a buyer and their lender, it is designed to protect them by verifying that home is up to par with the agreed upon selling price. In most cases, the buyer will be responsible for covering the cost of the appraisal.
Lenders may also require an appraisal when a seller refinances their home, but for the cases of this discussion, we are going to focus on the transaction between buyer and seller.
Who is an appraiser and what are they looking for?
According to The Appraisal Institute, a home appraiser is a licensed professional that provides an impartial, unbiased opinion about the value of real property.
For a residential sale, the appraiser is evaluating recent, nearby sales of comparable properties; while also taking into consideration the current condition of the property, as well as the location of the property. The appraiser should not consider things such as paint color or the furniture inside of the property. Specs such as bedrooms, baths, square footage, and amenities are more important and the criteria that should be considered.
Buyers: What if the appraisal is higher than your offer?
If the house appraisal comes in less than the contract price then you could be left to make up the difference out of pocket. It is possible that the sellers will agree to drop the price to match the appraisal. Here are the ins and outs of the appraisal process:
Understand what you can and can’t do. If you’re unhappy with an appraiser’s valuation, unfortunately, there’s not much you can do to change the actual outcome. It is possible to dispute an appraisal after-the-fact through a formal process, however rarely do they change unless the appraiser truly missed or omitted something. You can also ask for a revaluation, however, this tactic isn’t always easy to do either and will cost you another appraisal fee too.
Know the neighborhood comps. It’s always good to know what comparable homes in the area have recently sold for so you know prior to making an offer whether there is the potential for an appraisal issue or not. Help guard against this by having your agent provide you with comps prior to making an offer. Also, while your lender does not get to hand-select the appraiser, it is wise to ensure your lender is using a local appraiser that is familiar with your particular market.
Talk to the appraiser. There is a misnomer that you “can’t talk to the appraiser.” Sure, the appraiser would probably be a bit suspicious if you’re trying to “sell them” on the home, but they shouldn’t balk if you are providing them with valuable information. Communication is key, and there is nothing preventing your agent from providing information to the appraiser to assist them in their report.
Maybe the appraiser doesn’t know about the mold issue in the nearby home that just sold or the divorce that led to a quick sale. Also providing a list of recent upgrades to the home such as bathroom and kitchen remodels, or roof and HVAC replacements should be taken into account.
Sellers: What if the appraisal is lower than your listing price?
An appraisal lower than the agreed price can easily happen in a competitive market where multiple offers can force the price upwards. Multiple offers are almost always good news for the seller, but keep in mind that if the buyer is getting financing then the lender is going to want to protect themselves with the appraisal.
The good news is that a low appraisal doesn’t have to be a deal killer. Having a knowledgeable agent at your side can help walk you through your options.
Reduce the price of the house. As the seller, you can always sell the house at the appraised value without negotiating with anyone. This is the fastest way to “recover” from a low appraisal, but it could mean leaving money on the table which is always hard to swallow. Ask the buyer to bring cash. If the buyer really wants your home that bad you can ask them to bring the difference of the contract price and appraisal price as cash. Just make sure to get some type of verification or documentation that the buyer actually has those funds readily available to bring to the closing — never assume!
Meet in the middle. If both parties still want the sale to go through, it could make sense to split the difference, with the seller dropping the price a bit and the buyer adding cash to the down payment. This solution depends entirely on the relative willingness and financial positions of the two parties.
Challenge the appraisal. This option is a bit of a long shot where you convince the buyer to request a review or a second appraisal. Why would a buyer agree to this? Well, if you’re not willing to adjust the price and the buyer must walk, then the seller could sell the home to someone else. As the seller, you can support the buyer by offering to split the cost, or pay for the entire cost, of a second appraisal. For about $400-$500 it may be worth it if you have $5,000 – $10,000 on the line in regards to the purchase price.
Put the house back on the market. If the buyer can’t or won’t put more money down, and you’re not interested in reducing the price, you can take your chances by allowing the deal to fall through and putting the house back on the market. This can be disappointing to everyone involved, BUT if you were previously in a multiple offer situation then it might not be a bad way to go, especially if one of the offers was cash (which typically doesn’t require an appraisal.) Even without the cash offer, another lender’s appraiser could have a more favorable point of view.
Stay calm. The hardest tactic is also the most simple — above all, stay calm, look at the facts, and let your agent do the negotiating. Get to know our agents who always value your desires above all.
