Understanding Why the Appraisal Process is So Important
When you’ve found your dream home in the Charlottesville area, you and your Solutions agent will start to work on the purchase offer and discuss several items, including the home inspection, loan commit date and whether or not to add language that states the house must appraise for the purchase offer price.
Charlottesville mortgage lenders require an appraisal on a home before they’ll provide a loan as the property is the underlying asset that serves as collateral for the loan. If, for some reason, a Buyer runs into financial problems and loses the home to short sale or foreclosure, the lender would need to sell the property to repay the loan.
A lender will only approve a loan for a property that appraises for the full sales price of the home — or more. If an appraisal finds that the house does not so appraise then the Buyer and Seller have the right to negotiate or terminate the contract.
The Basics
A lender will choose an appraiser to evaluate the home that is being purchased. The Buyer pays for the appraiser’s fee. The typical cost is between 400-600 dollars.
A special note: There can be differences between what the property is really worth – market value – and what it cost to buy it – or price – which might not represent that property’s true market value. Appraisal data is collected on recent sales of properties similar to the subject being valued, called “comparables (or comps),” as they represent amounts actually paid or agreed upon for properties.
An appraisal is used to come up with a true market value for a house and is based on information that’s similar to the information your Solutions agent uses for a comparative market analysis, including such specifics as square feet, number of bedrooms and bathrooms, the location and age of the property and interior improvements. A home will be compared to others that the appraiser considers comparable to come up with the value.
There are new rules by the Consumer Financial Protection Bureau that went into effect in January 2014 that require a lender to give the Buyer a copy of the appraisal as soon as the mortgage company receives it, or at least three days before closing.
A Buyer can waive that right, but it makes sense for you and your Solutions agent to see it to have time to review and understand the information – which could include, but is not limited to, which homes were chosen for comp purposes, and to make sure the appraisal includes accurate information and takes into account intangible things that can add value, such as, for example, a location within a sought-after school district or near the University of Virginia or Downtown – the lender is using to determine how much to lend.
It’s important to recognize that an appraisal can function as a consumer protection for a Buyer. If it comes in higher than the negotiated purchase price, then The Buyer benefits immediately because there is now more home equity than expected. For example, if a Buyer is paying $300,000 for a home and the appraiser says it’s worth $325,000, he or she instantly has gained $25,000 in equity.
If the appraisal comes in lower than the sales price, The Buyer and Seller will need to abide by the negotiated contract if it is contingent on an appraisal. One option in this case is that the Buyer can withdraw the offer and have the earnest money deposit returned, thus saving the Buyer from paying too much for the home.
If a Buyer prefers to buy the home anyway or has waived the appraisal contingency to make the offer more attractive to the Sellers, there are a few other options:
- Challenge the appraisal with documentation from your Solutions agent
- Pay for a second appraisal, which may or may not come in higher
- Come up with extra cash to make up the difference between the appraised value and your purchase price
- Renegotiate the contract, if the Seller is willing
- Ask the Seller to finance the gap between the appraisal and the sales price
Your Solutions agent can advise you about the appraisal process and help you decide how to handle a low appraisal to match your interests
