Buyers: Navigate even a complicated appraisal like a pro
You’ve finally found it: Your dream home. Perhaps you searched for months, or maybe you were lucky and it was the very first one you visited, but no matter. The offer on your future home was accepted!
And now, my friend, the real work begins.
If you just heaved a heavy sigh or even uttered a curse word or two, we understand. We’re not offended, but hey, don’t blame us. We’re simply the messenger.
The home buying process can be draining, yes, but with the right professionals on your side to guide you through the home appraisal and closing, you’ll be ready for move-in day in no time! (And just think, compared to buying the house, moving all your stuff into it will be as easy as 1-2-3!)
An Appraisal: Why do I need one?
Maybe you’ve got stacks of cash at the ready. (We ask no questions!) If not, you’re going to need a loan to buy your new house. And that means that you’ll be required to have it appraised. In fact, even if you’re able to pay cash for your new dwelling, it’s to your benefit to get a property appraisal just to be certain you’re not overpaying.
Now, back to those of us who will need a mortgage…the purpose of the appraisal is to assure the lender the property is worth as much (or more) than what you’re paying to purchase it. Since the bank is lending you money, an accurate appraisal ensures they can recoup their cash if you default on the loan.
As the buyer, you’ll pay for the appraisal, but it’s really the lender who is the appraiser’s client. Interesting, isn’t it?
The appraisal process: How does it work?
Getting an appraisal is non-negotiable in this case. So,once the seller has accepted your offer and the property is under contract, it’s time to work out the details. One to two weeks after the final contract has been accepted, check in with your lender to confirm the appraisal has been ordered. As the buyer, you unfortunately don’t really have any control over this process. It must be done through the lender with a third party, and there’s a good reason why: since you have a vested interest in the amount for which the home appraises, even if you were to order an appraisal, by law your lender couldn’t use it.
The lender must follow the process set forth in the 2009 Home Valuation Code of Conduct (HVCC). The goal of the HVCC is to prevent lenders, agents or other interested parties from having any influence on the outcome of the appraisal. As a result, when the lender orders the appraisal, they don’t designate which appraiser is hired. Rather, the appraiser is randomly chosen from a list or through an appraisal management company. (We like to imagine a dartboard with names on it, but it’s probably a bit more formal than that.)
OK, great. Once the appraiser is chosen, you—as the buyer—get to sit back and wait. The appraiser’s job is to determine the estimated value for the property.
The goal for the appraisal?
To keep your deal moving smoothly, you (and the seller) hope the appraiser will confirm the contract price.
The appraiser, however, is an independent, unbiased entity, so they will concentrate on only what the property is worth, not what the interested parties want it to be worth.
The good news is in most cases, homes typically appraise as they’re priced. Case in point: A 20-year-long study examined appraisals submitted to the Federal National Mortgage Association (aka Fannie Mae) and found that more than 90% of appraisals valued homes at or above the purchase price.
What exactly does the appraiser consider when valuing the home?
Your appraiser is looking at many factors when coming up with the appraised value of the property. From interior upgrades to neighborhood quality, many things can affect the final number.
- Neighborhood characteristics, including the proximity of schools, parks, etc.
- House size, appliances and amenities
- Number of bedrooms and bathrooms
- Quality of materials used on walls, floors, and windows
- Recent nearby comparable sales (aka comps)
- Sales history of the property
- The estimated cost to rebuild – for insurance purposes
- Legal information – deed, property tax, flood zone
They will also examine the exterior of the house, the lot size, driveway condition, and car storage. (The latter is always a good reason to tidy up the garage every so often!)
The final report
If the home appraisal comes back “as is,” the appraiser has confirmed the value is consistent with the purchase price and you’re good to move forward. Conversely, a “subject to” note means a few complications have arisen. Most commonly, the appraiser is requiring a repair of some kind.
In a much smaller number of cases, the property has not appraised for the value of the purchase price. At that point, you have some decisions to make.
The appraised value came in lower than the purchase price: What now?
While not too common, a low appraisal is not unheard of. For example, a May 2021 National Association of Realtors report said 12% of recent terminated or delayed contracts were because of appraisal issues.
If you end up in this situation, it doesn’t necessarily mean the end of the deal (although it very well can). Depending on how flexible you and the seller are, you might have a few options.
Option 1: Renegotiate for a lower sale price.
Once a property’s appraised value comes in low, it’s likely to happen again. Not only that, an appraisal provides concrete evidence to even the most committed seller that their price is too high. In order to avoid souring the deal, they might be willing to renegotiate the price.
If they’re unwilling to budge on the price, there might be other factors that would make it worth it for you to go through with the sale.
Jesse Zagorksy, a real estate agent with 17 years of experience, says, “Have your buyer’s agent talk to the listing agent and find out what is truly important to the seller in addition to the price of the house. Are there any other terms that matter, such as the close of escrow date, furniture, and possessions, or offering free rent?”
Thinking creatively could lead to an option that ends up working for everyone, even if it’s one you wouldn’t originally have considered.
Option 2: Cover the difference or find a new lender.
With a lower appraisal value, your lender will lessen the amount of money they’re allowing you to borrow, which means you’ll need to increase your down payment in order to cover the difference. If you’re not willing to do that, you can also look into finding a new lender. A second lender would require a new appraisal, though. Although the same situation could recur, if you have good credit, it might be worth a try. Be aware that you’ll probably need to pay application and appraisal fees a second time. (Bummer.)
Option 3: Challenge the appraisal.
Appraisers aren’t perfect. They’re human, too, and sometimes make mistakes. If you can provide additional comps showing the house should be valued higher, or if the seller has made hard-to-see improvements to crawl spaces, major systems or what have you, asking the original appraiser to take another look might succeed.
Option 4: Walk away.
You read that right. Depending on how much you want the house and how perfect it is for your family, this could hurt. A lot. If the seller won’t budge and you’re unwilling to increase your contribution, however, it might be your best option. Additionally, if the house remains on the market for a while, you can always approach the seller again. The longer it sits, the more likely they’ll be ready to make a deal.
No matter what you decide, as always in real estate, keep a cool head and don’t let your emotions get the best of you. There will be other properties! We promise.
Time for the closing: What do I need to know?
Back to a rosier scenario: If your appraisal came in on target (or you were able to renegotiate after one that didn’t), you’ve made it to closing day! This is a big day that requires you to come prepared. Flexing those handwriting muscles is just part of it.
The day before the closing (or possibly even the day of closing), you’ll do a final walkthrough of the home. The purpose of this is to confirm that the property remains in the condition it was when you and the seller entered into the contract. Take this seriously. This is your chance to test the lights, appliances, and water pressure, peek into attics and crawl spaces to ensure they aren’t full of the seller’s cast-offs (or yes, rodents), and double check that all promised repairs were indeed completed. We suggest making a list so you don’t forget anything.
Next, pack your bag with all the items you’ll need to successfully close on your new house.
- The big, fat certified check. Failing that, you’ll need to provide proof of the transfer of funds.
- Photo ID. Bring this for anyone who is on the mortgage. You might consider bringing two forms if you have them. Talk to your agent to be sure you have what’s needed. (Don’t worry; nobody’s looking at the picture. The DMV brings out the worst in us all.)
- Homeowners’ insurance policy. Don’t forget this one. They’re kinda sticklers about it.
- Your copy of the contract. Make sure you know what you’re signing. Contract law 101!
- Additional documents as advised by your lender or agent. When in doubt, bring it with you.
All done? Celebrate.
Cue Kool & the Gang. With the appraisal and closing done, the papers signed and the keys in hand, it’s time to party. Pop open that bottle of champagne (or sparkling grape juice if that’s more your speed), and congratulate yourself for successfully navigating the home buying process! It might’ve seemed unlikely at different points, or potentially nerve-wracking, but you’re on the other side of it all now.
Keep the good vibes going; you’ll have plenty on your mind in the days and weeks ahead. (Yes, moving is a bit of a buzzkill, we agree.) But for now, just revel in your new dream home!