What is an Appraisal- and Why is it Important?

TO APPRAISE OR NOT TO APPRAISE- That is the question.

When purchasing a house, part of the financing process is to have the home appraised. This is when a licensed appraiser provides a value for the property based on comparable properties. They are looking features such as location, style, size, and condition. Your lender may require an appraisal in order to lend you money. You can only obtain financing on the appraised amount. Meaning, if you purchase a house for $450,000 and it only appraises for $425,000 you can only borrow up to $425,000.

So what happens if the property OVER appraises? Good for you! You have some instant equity.

If the property UNDER appraises here’s what can happen:

1. The seller can agree to lower the purchase price to the appraised value. This is the ideal situation and what you’d commonly see in a buyer’s market or a more balanced market.

2. You can negotiate with the seller and each come to the settlement table with a little more money to make up the appraisal difference. In a seller’s market the seller has more leverage.

3. If the seller won’t come down to appraised value or compromise you can walk away from the deal. Standard MD contracts have an appraisal contingency on the financing addendum. This protects you in this situation and you can be released from the contract and get your Ernest Money Deposit (EMD) back. Make sure you’re following the contract timeline because you only usually have a couple of days to make these decisions.

In a strong seller’s market like we have now it is common that buyer’s are amending the appraisal contingency to make their offer stronger and more appealing to the seller. Here are two strategies we’re seeing.

1. Buyers are waiving the appraisal contingency all together. This is very appealing to the seller, especially when you are offering over list price however, it is very risky for the buyer. If for some reason the property under-appraises substantially, you’re on the hook for the difference of purchase price and appraised value or can get out of the contract but will lose your EMD. The decision to do this should not be made hastily and you should review with your realtor worst case scenario for how much extra cash you may need to bring to the table.

2. You can offer to contribute a certain dollar amount to an under appraisal. This can be written into the contract. For example: If the list price is $430,000 and to be competitive (and you think the market could support it) you offer $445,000 you can write into the contract that you will contribute up to $5,000 to an under appraisal. This gives the seller a little reassurance that they’ll be able to guarantee more than the original list price.

What it means for Buyers: Appraisals are built in to contracts to protect the lender and to protect you. If you decide to remove or amend it in order to strengthen you offer it’s important you know the implications of that decision. Be sure to review with your realtor what the worst case scenario would look like.

What it means for Sellers: Receiving a contract on your house that is higher than list price may look super desirable but it doesn’t ensure that you pocket more money. Refer to your realtor to understand what price the market will support. In the case that you receive an offer higher than list price it may not make a difference to your bottom line unless the appraisal is waived or amended.

Final thoughts: in a market like we are in right now I am seeing offers being thrown around that are crazy. Buyers are removing all contingencies in an effort to “win” but forgetting that those contingencies are in place to protect them during one of the largest financial and emotional decisions of their lives. Having a knowledgeable Realtor who has your best interest in mind is paramount in navigating this market.

Want more information about the buying or selling process? Check out the resources page for an in depth look.