Over the next 12 weeks, this blog will focus in on the many parts of purchasing a home. We know that purchasing a home—whether it be your first or your fifteenth—can be stressful and confusing.
But it doesn’t have to be! We help people buy homes all the time! This series explores and explains the typical roadmap to purchasing a home. Some steps are more cumbersome than others, but if you know what to expect you won’t be taken off guard if (and when!) complications arise!
For this series’ seventh installment, we’re talking about appraisal! Once the due diligence period is complete (read all about due diligence here), appraisal is the next leg of your home-buying journey. Just like with due diligence, appraisal is paid for by the buyer. Payment is due either at the time the appraisal is performed, or beforehand with your lender.
So what’s appraisal anyway?? Basically, appraisal is when an impartial party inspects many aspects of the home (such as condition, location, comparisons to similar and/or nearby properties, the surrounding area, and added or unique features) in order to determine the home’s current value. Typically, your lender requires the home to be appraised by one of their approved appraisers. Besides ensuring that the buyer isn’t paying more than what’s fair for the home, appraisal lets your lender know that they're not lending out more money than they need to. There are three outcomes to appraisal: the value comes in at, below, or above the list price.
Note that a home appraisal is not the same as a home inspection. While the appraiser will make note of major issues, they won’t check the nooks and crannies of the home like the HVAC, chimney, or plumbing. Inspection is a separate check box in your transaction that should be done by a licensed home inspection professional.
So what is actually in the appraisal report?
- a section on the appraiser’s methods of inspection
- a section on the size and condition of the home’s permanent features, plus notes on improvements and add-ons
- reports on serious structural problems like wet basements and cracked foundations
- a section on the neighborhood, comparisons, etc.
- recent market trends and how they relate to the home
- maps, photos, and drawings
If the home is appraised at a value equal to the list price, nothing much happens (though it does mean that the listing agent did a pretty good job of pricing the home). More often than not, the appraisal is fairly close to the list price.
If the home is appraised at a value greater than the list price, that’s great news for the buyer! Should the home be appraised above list price, the seller cannot raise the sale price because you’re already under contract. This means that the buyer is paying less for a home that—according to the appraiser—is worth more. If the contract were to terminate, the seller is then free to raise the list price, but as long as they’re under contract the list price cannot be increased.
If the home is appraised at a value lesser than list price, your transaction can be delayed or terminated. A lower appraisal value gives the buyer a good argument to have the seller lower the price. The buyer has two options:
- Ask the seller to lower the price to the appraised value. If the seller doesn’t want to lower the purchase price to the appraised value, the buyer can walk away. If you choose to pull out, you cannot get the money back from appraisal and inspection, but you will get your earnest money back if your contract allows
- Pay the difference between appraised value and purchase price
If the seller is unhappy with the result of the appraisal, and you don’t want your contract to fall through, you can always get a second opinion or ask your original appraiser to re-evaluate their decision (they’ll be more willing to re-evaluate if you can prove the appraiser had misinformation or if the homeowner can correct noted repairs or maintenance issues).
Next week, we’ll discuss the finance contingency period—exciting stuff! Until then, if you have concerns or questions that we didn’t touch on in this post, give us a call!
The Better Buyer Series
- Searching for a Home
- Costs Associated with Buying a Home
- Putting an Offer on a Home
- Binding Contracts
- Due Diligence
- Finance Contingency Period
- Things to Remember (Credit Bureau Scoring, Making the Mortgage Process Easier, etc)