Home appraisals are a process through which an unbiased, licensed real estate appraiser assesses a home for its fair market value. When entering a real estate contract, buyers often hear two terms during settlement.
- Appraisal – The appraisal is essentially the lender’s valuation of the property.
- Assessed value – This is the amount the county uses to levy taxes.
Appraisals are required in real estate transactions if a loan is being acquired to purchase the home. Lenders base their loan amount on the appraised value or the sales price of the home…whichever is lower.
During the past year, when the housing market was a seller’s market, many buyers would often waive the appraisal contingency as an incentive for the seller to accept their offer. However, waiving the appraisal can put the buyer in a difficult financial situation regarding the contract because waiving the appraisal doesn’t mean the appraisal won’t happen. The lender still requires an appraisal, and if the loan type is VA or FHA, waiving the appraisal is not an option.
For example, if a buyer agrees to purchase a home for $350,000 but the appraised value comes in at $300,000, the lender will only issue the loan to the buyer based on a valuation of $300,000. The buyer would then be responsible for making up the difference as a down payment. The buyer can ask the seller to reduce the cost, but the seller doesn’t have to lower the contract price. The seller could agree; otherwise, if the buyer waived the appraisal contingency, then they face the dilemma of finding a way to finance the difference or defaulting on the contract, losing earnest money and being responsible for damages to the seller.
If the buyer obtains a VA or FHA loan and a contract is contingent on the appraised value, then the buyer has the right under law to void the contract should the appraised value come in low. The buyer has the right to return to the seller to negotiate a change in the contract that reflects the appraised value. If the seller doesn’t agree, the buyer can void the contract, and their earnest money will be returned.
Regulations have been put in place to separate lenders from appraisers. Before the 2008 mortgage crisis, many lenders employed their appraisers in-house or had relationships with appraisal companies. Lenders could put pressure on the appraiser to make valuations that would increase the loan amount, and appraisers discovered they wouldn’t get hired for appraisals if they didn’t work with lenders. Now, lenders go to appraisal companies when needed, but they don’t get to pick the appraiser.
Appraisals can be challenged. It is not easy, and it is likely to be unsuccessful because the lender wants to ensure they are protected if the market changes or the value of the house changes. If the buyer or seller thinks the appraisal came in low and wants the appraiser to rethink their position, their real estate agent can send comparables, or comps, to help re-assess the value. The agent lets the appraiser know that another home comparable to the appraised sold for this amount of money. Appraisers changing their minds doesn’t happen often, but the option is there.
If there are more questions regarding appraisals, please contact us here.