As Realtors who have represented hundreds of home buyers, we can testify that appraisals bring about lots of questions. Our clients generally view the appraisal and the home inspection as the biggest hurdles of the purchasing process once we’re under contract. We’ve included below the most commonly asked questions along with our answers!
Do I have to get an appraisal?
If you’re taking out a mortgage to pay for your home, your lender will require an appraisal prior to closing. The reason is that the bank wants to make sure should you default on your loan, they’ll be able to sell the home for approximately the loan value. However, if you’re paying in cash, it’s completely up to you as to whether you get an appraisal. In some cases, it can be a good idea to forego the appraisal. Not only will it save you money, but it can also help your negotiating power. For example, in a multiple offer situation where it’s clear that the home is not overpriced, making your offer not contingent on an appraisal can improve your chances of getting the home you want.
Does the appraiser know the price stated in our contract?
Yes, the appraiser generally has a copy of your ratified contract showing the purchase price before he determines appraisal value. He also can see details such as how much the seller is paying in closing costs (read more on this below).
How much do these reports cost?
Depending on the company, the cost is somewhere between $350 and $500. This amount is usually deducted from the Settlement Statement at closing, so buyers generally don’t write a check for this.
What happens if the appraised amount comes in below our contract price?
It’s common to have appraisal issues in a strong sellers’ market where prices are escalating at a fast rate. The reason is that appraisers use comps dating back to 5 months’ history. So even if you were able to compare 2 identical homes 5 months apart, the more recent appraisal would have a higher price simply due to increased demand over time. If the appraisal comes back too low, the buyer and seller usually renegotiate the price and meet in the middle. So for example, if the original contract price was $275,000, and the appraised price comes in at $270,000, the buyer and seller typically agree to change the purchase price to $272,500.
If my home doesn't appraise for the right price, should I still purchase it?
There’s no right answer to this question. When an appraisal comes in low, some buyers question whether they should back out of their contract and find another home. If the appraisal is just one problem in a long list that has developed over the home buying process, it might be a good idea to consider other options. However, appraisals are certainly objective (despite the systematic approach used), and five appraisers might come up with four or five different values. So, if you love the home and you’re simply worried about an appraisal discrepancy, I would not let this one thing derail your purchase. Talk with your Realtor to see her opinion because it will completely depend on the home, your local market, and your situation.
How do seller concessions affect an appraisal?
Alright, this is a question we never get, but we wish more buyers understood this tradeoff better! The appraisal value needs to be the same price or higher than the purchase price in your contract. Often, buyers ask the seller to pay some of their closing costs, and this concession is included in that purchase price. For example, let’s say that the buyer and seller agree to a purchase price of $450,000 and that the seller will pay $5,000 of the buyer’s closing costs (netting the seller $445,000). The appraisal comes in at $446,000 which is less than the purchase price. In this case, the closing costs are going to make the situation stickier. Without the concessions, the seller might agree to meet in the middle as the fairest outcome. However, I’ve witnessed quite a few times where the seller wants to cut out concessions altogether. Sticking to a $445,00 purchase price would net him the same amount. He might view the closing costs as an unnecessary part of the contract – even though the buyers are relying on those concessions in order to be able to afford their closing costs. Your Realtor should be able to smooth over this problem if it arises, but it’s an important topic to cover while we’re talking about appraisals.
What happens if the appraisal price is higher than contract price?
Congratulations! This means that your home might actually be worth more than what you’re paying for it! And don’t worry – there should be no more price negotiations with the seller. Sometimes buyers worry that the seller will find out and want to renegotiate the price for a higher dollar amount. However, you’re paying for the report, so there’s no reason to ever share the results with the seller in the instance that you get a higher appraisal price than expected. This information is considered confidential and will not be shared with the seller or his real estate agent.