By Living Room Realty, March 3, 2020
What is an appraisal?
They are performed for the benefit of your lender by a third party (the appraiser) and paid by for you. For most buyers, they are a requirement of your loan. The purpose of an appraisal is to analyze the home and reassure the bank that the value and condition warrant giving you a loan at the agreed upon sales price. In other words, it’s worth what you’re paying.
Here is a lending scenario to help understand the effect a low appraisal can have on a buyer:
You are approved for a 20% down payment loan. For a $500,000 purchase, here is the math:
$500,000 purchase price
$100,000 total down payment
$400,000 loan amount
IF the appraisal comes in at $475,000 then the math changes:
$95,000 total down payment
$380,000 loan amount
But wait, your bid was $500,000.
In this case, the lender will still only lend you 80% ($380,000)of the appraised value ($475,000).
$500,000 purchase price
$380,000 total loan amount
$120,000 down payment needed to qualify for the loan
Let’s back up again. The sales contract states that both the buyer and the home must qualify for the loan. The appraisal is how your home qualifies for the loan. The appraisal falls under the financing contingency and therefore your earnest money deposit is protected, should you need to terminate the sale due to no longer qualifying for the loan. In the event of low appraisal, any of these things can happen:
-neither buyer nor seller are obligated to move forward with the sale. Either/or both buyer and seller can terminate the transaction and buyers earnest money is returned
-seller can lower the sales price to match the appraised price
-buyer can bridge the gap between sales price and appraised price, in this case bringing an additional $20,000 cash to closing.
-buyer and seller can meet somewhere in the middle with sales price
In multiple offers, where the sales price gets bid up, one of the things the seller is looking for is a buyer that has some cash to pad the deal if needed. There can be concerns about the price going too high to appraise. If a buyer does not (or cannot) provide assurance to the seller that an appraiser will bless the offering price, it may not make sense to take the highest offer, if appraisal does not come in at the sales price and the buyer cannot get the loan. The deal falls apart. This is why sellers will take a lower offer, with a bigger down payment. They don’t believe the higher price will appraise. This is why sellers love cash buyers – there is no appraisal requirement because there is no bank. In the event of multiple offers, some buyers have the cash to bring the extra down payment, or they might qualify to get a lower down payment loan.
You should know that in any multiple offer situation, I am gauging not only where the price will go, but also assessing how appraisal will go and what might come up. There are a lot of factors I am constantly assessing when showing homes and writing offers. It is all a balancing act of buyer comfort, market demand and of course, the appraiser!
Are your eyes glazed over, is your thought bubble saying “Who even thinks about these things?!!” I do. That’s why you need me. I’m the one who thinks about these things. Because, why fight so hard to get into first position, only to have appraisal issues in the home stretch?
