Leigh Anne Monk: The focus of this segment is the all important appraisal. An appraisal is conducted after the buyer and seller have agreed upon pricing and terms and have a ratified contract. But before we get into the details of the appraisal process, let’s start with the basics. Mark let’s define first what exactly is an appraisal.
Mark Wozniak: Well an appraisal is really an opportunity for the bank to have an independent third-party verify what the market value is of the home under consideration. So obviously the buyer and seller have agreed to what they agreed to what they believe the fair market value is of the home.
The bank now wants to have an appraisal to have that independent party say hey we agree that the home is either worth this much or worth more or worth less. Because the bottom line is that the bank is going to lend a certain percentage to you based on the lesser of the offer price on the home or the appraised value of the home so this is the opportunity for the bank to determine what is that value that they’re going to lend against.
And the appraisal is conducted by a person who is hired by the bank. It’s not necessarily someone who worked for the bank. It’s an independent person but they’re hired through the bank not through you the buyer not though the seller. The appraisal is done entirely for the bank. They bring the appraiser out and the appraiser provides the ultimate report back to the bank.
Leigh Anne Monk: Okay so let’s talk more about that appraisal report. What exactly is contained in it and what is the outcome from there?
Mark Wozniak: Sure. The report is prepared by the licensed appraiser that came out and what the appraiser does is they go to the home they take a look around and assess the condition of the home and then when they’re done. They compare that home to other similar sales in the area within a recent time period.
What the appraiser likes to do is they will look at homes that sold for a little less and homes that have sold for a little more than have similar features. It’s what they call bracketing the home within a certain price range and then they’ll look at the differences in features between those homes that they’re comparing against and they will do adjustments on the home that you’re hoping to purchase. And at the end of that report they state based on all these adjustments and what other homes sold for and how their condition compared to these homes condition.
Here is what I the licensed appraiser say is the market value of this home. So the outcome then is of the report that they prepare and they turn that report over to the bank.
Leigh Anne Monk: Okay. That outcome really is a number that says I believe based on my experience that this house is worth “x” dollars. Correct?
Mark Wozniak: That’s correct.
Leigh Anne Monk: But there are different results that can be at or above or below. Why don’t we discuss those because that has a lot of influence on what happens next?
Mark Wozniak: Sure. That has an enormous impact to you the buyer. So you as the buyer are hoping that the appraisal comes in at or above the purchase price that you and the seller have negotiated. If it comes in at or above then everything’s fine, the bank will lend on the amount of the purchase offer the settlement can take place just fine.
The more difficult situations is if the appraisal comes in below that agreed upon value. If it comes in below there’s several things that can happen but one thing for sure is that the contract at this point will be either be renegotiated or potentially voided.
Leigh Anne Monk: So that’s because Mark the lender is saying that they cannot loan the amount that buyer intended to buy that house for so that buyer no longer has the loan that’s equal to that purchase price.
Mark Wozniak: That’s right. So let’s use an example. Let’s say that you and the seller have agreed to four hundred thousand dollars as the purchase price and that the bank had agreed to lend you eighty percent of that amount so the bank was saying up front that if the appraisal comes in okay we’ll lend you three hundred twenty thousand dollars on this home. Now if the appraisal comes in at three hundred fifty thousand dollars then the bank’s only going to be willing to loan eight percent against that three hundred fifty thousand dollars.
So now you as the buyer are in a situation where you were expecting to get a loan of three hundred twenty thousand dollars. Now the bank’s willing to loan you a lot less so that presents you with a situation that you need to rectify and there are a few ways to do that. So one way is that the seller could agree to lower the price of the home. So using my example if you had offered four hundred thousand dollars and agreed to that and the appraisal came in at three hundred fifty thousand dollars. The seller could agree to lower the price of the home to three hundred fifty thousand dollars. That way you would still be okay in getting your eighty percent loan against that so that’s the case where the seller would affectively take the hit on the low appraisal.
The flip side to that is you as the buyer might say well I’ll make up the difference out of pocket so what that is saying is hey the bank is only going to loan me a lesser amount than I expected but I will actually come out of my pocket and make up that difference so that I can still pay you four hundred thousand dollars on this home. Obviously we would only want to go to that situation if the seller refused to lower the price of the home. What happens more often than not is really some combination of the two. It really does reopen negotiations on pricing where seller and buyer agree hopefully to meet somewhere in the middle.
Now if they cannot come to an agreement at all then either party in the contract because of the low appraisal amount does have the right to void the contract. So you can get out of the contract at this point if you can’t reach agreements and we would move on to the next home. This is a contingency so this would be a situation where if you’d put earnest money down and had to get out of the contract because you couldn’t reach an agreement on the appraisal and renegotiating that price you’d be able to get that earnest money back.
Leigh Anne Monk: Right but regardless of the outcome Mark as you know the buyer pays for that appraisal and usually what happens is the lender collects it from the buyer and the lender in turn makes that payment to the appraiser and that does happen upfront so if in the unfortunate situation the contract is voided that is a cost that you have to incur but it is still well worth it because without it you can’t get a loan.
Mark Wozniak: That’s right. Look, this is as a necessary step; it’s a necessary cost in the home buying process.