After the searching, after the contract, after the loan application, comes the appraisal. The appraisal is the traditional ceremony of determining if you paid too much for the property or to see if you nabbed yourself a great deal.
Technically, the purpose of an appraisal is to protect the lender from loaning too much money on a property. If your real estate agent has done a good job providing comparables and negotiating the contract, you’ll not have this problem.
A lender wants to assure the target property is worth as much money as the buyer is going to pay for it. For the buyer, a low appraisal could jeopardize the transaction, especially if the borrower is stretched for cash. Generally, if an appraisal for a property is too low, the lender may not approve the loan for the property.
A lender will only approve a loan up to a certain percentage of its appraised value, traditionally 80 percent ($80,000 on a $100,000 property). If that property comes in at $95,000, the lender will still provide a loan, but the buyer may have to come up with additional money to honor the contract for a $100,000 price.
If the contract was contingent on a satisfactory appraisal, the buyer may be able to negotiate the price down. The seller may consider this a viable option because once the property has been appraised at one amount, more than likely, with another contract, the same appraisal may come in. It’s better to cut the price and move forward with the settlement.
Another option is for the buyer and seller to split the difference — $5,000 in this case. The seller reduces the price by $2,500 and the buyer comes up with an additional $2,500. If there’s no money to be had and the buyer really wants the property while the seller is fixed on the price, then the seller needs to work on challenging the appraisal.
First, to prevent from having a low appraisal, a seller should prepare the house for the appraiser as if the appraiser were a hot buyer prospect. The appraiser isn’t just going to consider the price and make an offer, he or she is going to set the real price of the house. Make it show its best.
Clean up, shampoo the carpets, paint, touch up, mow, trim and do all those things that make it look its best. The appraiser is going to determine true value. If after all this fixing and cleaning up the appraisal still comes in too low, move to Phase 2.
Phase 2 is where you and our agent conduct some more homework on your community. More than likely the appraiser has looked up the last few sales that have settled, but go ahead and get these together. In addition, look at them very closely — do they match your house exactly?
For instance, does your property may have three bathrooms when all the other houses had only two-and-a-half? Do you have a finished basement or addition the other houses don’t have? What were the prices and descriptions of these properties and could they help increase the value of your house?
Or, has there been a sale so recent that the appraiser missed it? Or a nearby sale that somehow was not considered? It doesn’t happen often, but it can happen.
Most appraisers know their business and will conduct a thorough appraisal on the property, but if you think your valuation should come in higher, you need to make your case with facts and documentation.
Written by M. Anthony Carr