Appraisal Contingencies And How They Work
When I tell my clients it’s time for the home appraisal there can be a mix of emotions and key questions to answer. It is an essential hurdle to overcome if the buyer is obtaining a loan. On the one hand, they are thrilled to have a contract and a lot of hard work has paid off; on the other hand, there is a palpable concern as to whether the house will appraise for the contract price. And, then what? An appraisal is required by the buyer’s mortgage lender. The bank wants to make sure that the value is supported for the home they are going to lend on. We remind our clients that we have been thinking about the appraisal from the very beginning.
WHAT EXACTLY IS AN APPRAISAL AND HOW DOES IT WORK?
If a buyer is borrowing money to purchase your home, an appraisal contingency will be written into the contract. This protects the buyer if the appraised value of the home is lower than what they are paying. After a final purchase price has been agreed upon, the buyer is responsible for contacting their mortgage company to start the appraisal process. The buyer and seller will have already agreed upon when the appraisal contingencies are due to be removed. In our area of Long Beach, CA, a 17-day appraisal deadline from when the contract is signed is standard, however, in a more competitive market oftentimes the appraisal contingency is reduced to 12-15 days.
The buyer’s lender will contact a third-party company to conduct the appraisal of the property to make sure the purchase price can be validated according to the market. This protects both the buyer and the mortgage bank. Then the lender arranges for a licensed third party appraisal company to visit the home to assess, investigate, record, and collect data from comparable homes in the area and make the necessary adjustments.
When I review an offer with a client and suspect there could be an appraisal problem (For example, in a multiple offer situation where the bids have gone well above the list price), I might recommend to our seller that we ask the buyer to waive the appraisal contingency in the counteroffer. If the buyer has a high down payment and is showing sufficient funds to cover the difference between the sale price and the appraised value and if the buyer wants the property badly enough, they’ll typically waive the appraisal contingency. This way it is understood that if the home appraises for less than the agreed-upon price the buyer will simply pay the difference.
Take a cash buyer out of the scenario and who is your ideal buyer? Someone who is putting 20% down or more. Someone showing proof of funds that you can comfortably identify as strong and fit financially. That’s my client’s best situation because now if you have a discrepancy between the appraised value and the purchase price, you’re more likely to have a buyer who’s willing to work with you.
I tell both buyers and sellers that there are 3 things that can happen if a home doesn’t appraise. One, the buyer pays the difference because they see that the values are climbing and the market will catch up to the price they are paying. In an ascending market, it’s important to keep in mind that the appraiser’s job becomes a lot more difficult when they don’t have the closed sales to support the price that everyone is agreeing to. Second, the buyer and the seller meet halfway, which is a common solution during a more normal market, and third, the buyer and seller cannot agree and the buyer terminates the contract.
What can be done if the home doesn’t appraise? The buyer can ask their lender to appeal the appraisal, which means you are asking the appraiser to reconsider their opinion. Buyer’s agents should provide the lender with comparable sales to support the appeal process. This can result in the appraiser amending the original appraisal. If nothing else, it’s worth a shot before paying the difference or throwing in the towel.
Some buyers will try to make their initial offer more attractive upfront by including the amount they’re willing to pay out of pocket should the home not appraise — in which case the appraisal contingency isn’t such a major barrier for sellers and it gives the buyers a safety net capping the amount they are willing to cover above the appraised value.
The market will determine what your home is worth. While this statement is true it’s important to remember that the appraiser is an individual and in many cases, no two appraisals are the same. It’s that individual’s knowledge and ultimately their opinion that you are relying on. Though the appraisal company is bound by standards and ethics, some of the reporting is based on knowledge, experience, and information provided to them, which is why we always meet the appraisers at the property for our listings. I want to make sure the appraiser has the best comparable sales to support the price. We remind our sellers to make sure their home is ready to be seen and evaluated. We also provide in-hand information about the upgrades, special features, newer improvements, and so on.
The big takeaway here is to PREPARE accordingly. Review the comps and recent sales with your agent to determine the best price and strategy. And, proceed with the most qualified buyer who is financially fit. Your realtor should be knowledgeable, armed with solutions, and a skilled negotiator. There is too much on the line to put this process in the hands of someone that isn’t experienced enough to navigate this process.
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