It has been known to happen. A seller puts their house on the market. A prospective buyer makes an offer. The seller accepts it. Now the real work begins. Next come the inspections, physical, pest, HVAC, roof, pool, etc. And if the buyer is getting a loan, the most important one of all…the appraisal!
What is an appraisal? Well it is basically how the lender determines if the home is worth what they are being asked to loan. But it’s more than that. The appraisal is an opinion of value at the given moment. Huh? You see, appraisals can change on the fly based on what the market is doing. As an example, let’s say your appraisal came it at a value of $480,000, and that is what the accepted offer was. Great we have a deal. Now let’s say the next day the exact same floor plan closes at $500,000. There is a new baseline established and the buyers just benefited by having the equity rise by $20,000.
But what happens if the appraisal on that $480,000 offer came in at $460,000? The lender is not going to loan on a property that they feel is not valued at the agreed upon sales price. In essence the seller has to sell the home twice, once to a buyer and then to the lender. So now a renegotiation between the buyer and seller takes place and typically there are a few outcomes that happen.
- The seller can lower the price to the appraised value.
- The buyer can agree to pay the difference and bring in more cash.
- The buyer and seller can split the difference.
- The deal can be cancelled and everyone goes their separate ways.
If an agreement cannot be reached, and the contract included an appraisal contingency, meaning the home had to appraise at the agreed upon price or higher, the buyer can cancel and get their deposit, if any, returned in full without penalty. It’s also important to remember that an appraisal is an opinion of value in a given moment. So if a seller had an appraisal done say 3 months ago, the lender will not accept that and will still have an independent appraiser go out.
The last thing to consider is that depending on the type of financing the buyer is getting, the appraisal could be more detailed. As an example, if the buyer is getting an FHA or VA loan, the appraiser may “call out” things like chipped paint, structural issues, mold and the systems in the home. If you are thinking about selling, you need to understand how the financing terms you will consider could affect the appraisal and ultimately the sale. So it’s not just about price, consider what types of terms will be acceptable to you.