Once you have determined that there are no defects on title and all inspection concerns have been addressed, it’s time to order an appraisal.
An appraisal is an unbiased professional opinion of a home’s value. The appraisal of your prospective home is as important as your credit history, or your income, in obtaining a mortgage. After all, the property you are purchasing serves as collateral for the loan. The point of the appraisal is to determine whether the home’s contract price is appropriate given the homes condition, location, and features. The lender wants to make sure that you are not over-borrowing for a property and the appraisal helps protect them against lending more than they may be able to recoup should you default on your loan.
Although the primary goal of the appraisal is to justify the lenders investment, it also protects you from overpaying. Typically, your lender will charge you a fee and will order the appraisal, which will then be assigned to an appraiser. You and your lender do not have control over who is hired to complete the appraisal. A property’s appraised value is influenced by recent sales of similar properties and by the current market. Usually the appraiser will do a full visual inspection of the interior and exterior of the home and note any conditions that adversely affect the property’s value. They may call out safety/major issues that the seller will be required to fix, like a missing railing on a deck, or a roof that is at the end of its life.
If the appraisal comes in at or above the contract price and with no conditions, you’re good to go and the transaction will proceed as planned. Occasionally repairs may be called out on an appraisal report regardless of value. These conditions could be a roof, unsafe living conditions, non-working appliances, missing smoke or carbon monoxide detectors, etc. Conditions must be cleared before the transaction can close. Example: You are purchasing a home for $346,000 and the appraisal came back at $350,000 but with conditions. The home does not have smoke detectors installed and is missing a handrail on the stairwell. The value is there, but the seller must install smoke detectors and a handrail before closing. The buyer may have to pay for the appraiser to go back to the house for another visit, though some appraisers will allow photos of the completed repairs. If the appraisal comes in low, we will need to go back to the negotiating table. It’s likely that neither you nor the seller want the deal to fall apart. The bank won’t lend you more than the appraised value. The three options at this point would be for the seller to lower the price, for you to come up with the cash to cover the difference between the contract price and the appraised value, or you meet somewhere in the middle. If an agreement can’t be reached, the contract can be terminated.
When we are looking at homes, and going through inspection, we will keep an eye out for issues that may come up during appraisal. The appraisal is just another step in the closing process and though it can be a scary time, we all want the same thing. In most cases, everyone is willing to work together to come up with a solution and proceed to the finish line.
