How Appraisals Work

Appraisals: What are they and why do you need one?

What is an appraisal?

An appraisal is a value assigned to a home by a licensed appraiser. They get to the value by walking through the home and then comparing that home to recently sold properties in the surrounding area. They will also factor in the local market conditions as well as the home's condition, its upgrades and features.

Why do you need an appraisal?

Whenever you are obtaining financing for a property, the lender is going to require an appraisal.

The lender wants to make sure the property is worth the price you have offered on the home.

This gives the lender the knowledge and security that you are not paying $600,000 for a property that's only worth $300,000.

We usually recommend ordering the appraisal after the inspection period is over and here's why…

If you order the appraisal and home inspection at the same time and end up not moving forward with the purchase because of something that came up during the home inspection, you will be out BOTH the appraisal AND inspection fees.

However, if you order the appraisal AFTER the home inspection has been completed, you will be confident you are moving forward with the purchase. This way, you won’t be paying for an appraisal on a property you are not purchasing.

So, what do we need to see in an appraisal?

What We Want:

We are looking to get a value back from the appraiser that is equal to, or higher than what you have agreed to pay…. so… if you are under contract at $400,000, as long as the appraised value comes in at $400,000 or higher, we are good to go!

What We’d Prefer not to Happen:

If, for some reason, the appraisal comes back under $400,000, say at $390,000, we would have to work to negotiate a solution with the Seller.

This is because the lender is only going to base their loan amount and calculations off of the appraised value ($390,000 in our example).

Any shortfall (the difference between the contract price and the appraised value… $400,000 - $390,000 = $10,000) would have to be covered by either or both parties.

Options to cover the shortfall include:

1 - The Seller drops the price to the appraised value.
2 - You, as the Buyer, come up with additional cash to cover the difference of the appraised value and the contract price.
3 - ”Meet in the Middle” where the Seller drops the price part of the difference, and you bring additional cash to cover the remainder.

If no agreement can be reached regarding covering the appraisal shortfall, the purchase will be terminated. The seller will put the house back on the market and you will continue to look for homes.

Sometimes, appraisals can be tricky to understand. I hope this helps!