Congratulations! You have made a bid on the home of your dreams and it was accepted.
You then ordered a home inspection and fortunately, the house was found to be in good
condition, or you were able to negotiate the necessary repairs. Next up? A property
The appraisal is meant above all else to be a safeguard for the mortgage company,
which will never agree to loan you more money than the current property value as
determined by an objective appraiser. All appraisers are state-licensed and work
independently of mortgage lending institutions to ensure fair and accurate valuations.
Appraisers will take either a sales-comparison approach (also known as ‘comps’) or a
cost-approach to determining your property’s valuation. The sales-comparison method
entails comparing your property to a handful of other homes that have sold in your
neighborhood. On the other hand, the cost-approach method is based on what it would
cost to replace the structure if it had to be rebuilt.
The appraisal report includes, among other things, a comparative market analysis that
supports the appraisal, the size and the condition of the house, statements regarding
structural problems, notes about the surrounding area or community, and maps and
photographs. The appraisal amount includes not only the house but also the land that
the house is built on. The cost of an appraisal typically runs around $300.
If the appraisal comes in below your agreed-upon purchase price, you have a problem.
But don’t panic! Start by looking at what caused the low appraisal. If there is an error in
square footage, lot size, or number of bedrooms, then the appraiser may be willing to
adjust the appraisal accordingly after the changes are made. A second option could be
to order a second appraisal from a different appraiser. There is always the possibility
that your first appraiser was relatively inexperienced or unfamiliar with the area where
the property is located and as such pulled the wrong properties for the comps.
If you exhausted both options for getting a higher appraisal, then the following three
- Have your attorney or agent go back to the sellers with the appraisal and a
request to lower the contract price to the appraised value. It is very common for a
seller to concede for a valid appraisal.
- Pay the difference between the selling price and the appraisal price out of
pocket. If you plan to hold on to the house long enough to see a rise in value, this
option is worth considering.
- If negotiations fall through and the appraisal is still too far below what the bank is
willing to finance, then you will have no other choice than to cancel the
transaction. You’ve done all you can do, and luckily there will always be other
homes on the market!
How would you ‘appraise’ my latest installment of real estate tips based on Keep calm…
It’s just real estate? We hope you like these tips, and we will be sharing three more in
the next few months.