Ah appraisals… the one piece of the real estate puzzle that buyers, sellers, agents and lenders truly have no control over. Not having control can be scary and frustrating. So what is an appraisal and how does it affect the buying process?

If you are obtaining a loan for your new home purchase, there is a very good chance that the bank giving you the money will require an appraisal. They want to be sure that they are not giving you more money for the house than it is actually worth. The appraisal is a professional assessment of the current value of the home based on recent sales of similar homes in the immediate area. They take into account may different criteria and assign it a value. Believe it or not, the appraisal value is only good for that one moment in time and can change the next day based on market conditions. The appraiser is independent from the bank and is not allowed to be influenced by external parties, such as the bank, lender, agent, etc. The final report given must be unbiased.

Here is an example of how an appraisal works. Let’s take two houses that are the same size and similar build style in the same neighborhood. One of them backs up directly to train tracks and the other across the street backs up to a beautiful pond. The one that backs up the the tracks may be given a lesser value than the one that backs up to the pond. But here is the kicker… although there are guidelines for appraisers to go by, this is not an exact science. Two different appraisers can come up with different values for the same home… it has happened!

So why does all this matter? In a competitive, sellers’ market, many buyers have to offer above the list price in order to win the house over other buyers. Sometimes the list price is already above what the neighborhood is typically selling for and, therefore, even offering the list price is a risky move. So what is “the risk”? Why is it risky?

Let’s look at a potential scenario together. Perhaps you are under contract to buy a house for $300k but the appraisal value comes in at $290k. The bank will only lend up to the $290k. That leaves a $10k difference which can be handled in a few different ways:

• The buyer can ask the seller to lower the contract price to the appraisal value and the seller may agree to this.
• The buyer can ask the seller to lower the contract price but the seller only agrees to meet the buyer half way (or part way).
• The buyer can ask the seller to lower the contract price but the seller refuses to budge. This means the buyer must bring the full $10k difference in funds to the closing to make up the difference.
• And sometimes, in many competitive scenarios, the seller will ask the buyer to write an email stating that a price reduction will not be asked for if the appraisal comes in lower than the contract price. (Please note that in NC, this does not actually bind the buyer to completing the purchase. A buyer in NC can walk away from a transaction for any reason or no reason at all.)

When an appraisal comes in low, I have been asked if there is a way to change the appraiser’s mind. It might be possible to send the appraiser comparative homes that the listing agent used to determine the listing price for the home. It may also be possible to switch lenders and pay for a new appraisal (thus lengthening the sales timeframe and potentially costing the buyer more due diligence money). I will say, however, that often times the original appraiser does not change the value assigned and changing lenders can be a big hassle that may end up costing the buyer quite a bit of money to do.

Now you can understand that a buyer may potentially be required to bring the full difference to the closing between the appraisal and offer amounts. This is something that a buyer needs to be fully aware of before putting in an offer. It is better to be fully educated and prepared up front rather than be shocked and miserable later.

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• Click here to learn more about the Due Diligence Fee.
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• Click here to learn more about the benefits of having a buyer’s agent.
• Click here to learn more about the benefits of having a seller’s agent.

Happy Home Buying & Selling In North Carolina!