An appraisal is the valuation of property as determined by an appraiser. The appraiser goes out to the house, evaluates its features and size, takes pictures, and then compares it to other similar homes in the area that have sold over the past six months. They compare the number of bedrooms, the size, and the style, to other homes within the same town, preferably within one to two miles. The appraisers use an objective system to determine the value of the home. This value often differs from what the seller and buyer have come up with, which is a sales price based on negotiation. Sometimes, the appraiser comes back and says, “Well, compared to other houses sold in the area, this is not worth what the purchase price on the contract says.” This can become problematic when the lender does not want to give a mortgage on a home that is overvalued. From the lender’s perspective, they don’t want to take a chance because if they’re overpaying, and the borrower defaults on the mortgage, the lender is stuck with a house that isn’t worth as much as the mortgage.
I’ve had this happen. We were halfway through the mortgage process and the appraiser came back and said, “This house is worth $50,000 less than you’re buying it for.” At that point, the buyer has several options, and I’ll focus on those options since my client is the buyer. The first option is to renegotiate the price with the seller. You don’t want to buy a house that the minute you walk in the door, the value has dropped X amount. Of course, the sellers will say that we agreed on the previous price, and won’t want to lower the price, so it could be a battle. Sometimes it works, sometimes it doesn’t.
Option two is you can buy the house. In the eyes of the lender, the purchase price is now what the appraised value is, so if you’re putting 20% down, you’re putting 20% down on the appraised value, You’re still buying the house for the original contract price, so you have to then come up with the difference between the appraised value and the contract price out-of-pocket, so you’re bringing more money to closing. The lender normally has no problem with this option.
Option number three is that you can walk away from the deal. This happens when the seller won’t renegotiate the price and you aren’t willing to come up in price. You don’t want to overpay for the house, so you don’t complete the purchase.
What I usually see happen is that the buyer and seller meet somewhere in the middle. I tell my clients, “Look, before the appraisal you were happy with the purchase price. This is a good chance for you to renegotiate the price and it may be a meet in the middle somewhere price.” It doesn’t always work this way because sometimes the buyers don’t have enough money for a down payment. If they’re only putting 5% down, they won’t have the extra money. But I always tell them to try to meet somewhere in the middle; maybe you’re overpaying based on the appraisal, but you were happy with the price a week ago. So, we meet in the middle. The sellers probably aren’t happy, but they want to sell. The buyers are getting a better deal than what they’d originally worked out, so they’re good to go.
One of the things I almost forgot to mention is that appraisals can be challenged. It’s a very difficult process, because the way the challenge works is that you have to find mistakes in the appraisal or you need to find comparables that are better than the ones used. Once you submit the challenge, it goes back to the same appraiser. This makes it especially difficult because you’re asking the appraiser to acknowledge they missed something or made a mistake. Who wants to say that? It’s rare that I see a challenge work. Recently, I had an appraiser who had the square footage wrong in the appraisal. It wasn’t the house; he made a mistake, acknowledge it, and made the adjustment.
As your trusted mortgage advisor, I will help you with any appraisal issues that arise during your home-buying process. Call or email me today if you have any questions.