The appraisal

A - Real Estate Appraisals: How can you minimize concerns?

Purpose of the appraisal:

An appraisal is done to assure the lending party that a home has sufficient value to cover the loan if the borrower defaults and legal action (foreclosure) is required.

The appraisal is usually performed after the other contingencies have been met, often just prior to closing.

If the appraiser reports that the home did not appraise to the selling price, the sale is in jeopardy. However, when the market is undergoing normal appreciation and the selling price is not over the appraiser’s estimated value by too much–say four or five percent–the appraiser will usually give the property the benefit of the doubt and reflect a full appraisal on the property.  

Buyer and seller reactions:

If the appraised value comes in under the sale price, some buyers will panic as they do they want to overpay for the property. Neither do they want to lose the house when the lender backs away from financing the loan, which could happen if the buyers aren’t putting down a lot of money. After all, they need someplace to move to and, keep in mind that appraisals are usually done with little time left until the closing.

Some buyers feel that a low appraisal is an invitation to renegotiate the sale price. Simply reducing the sale price will usually solve the problem. Or possibly the buyer can put more money down (doubtful). A compromise can sometimes be reached between buyers and sellers; a lower price and more money down may solve the problem.   

Must "appraise” to selling price:

Some purchase offers state that the home must appraise to the selling price. On occasion, agents will add this contingency to the offer. Some offices even have this preprinted on their purchase offers.

An agent will say that it's their way of protecting their client, although often the real reason is that the agent is not that familiar with the local prices or confident in judging the value of properties. An agency may require their agents to do this as simply another layer of liability protection. This usually isn’t necessary since the lender will pull the plug on this deal if the value isn’t there. 

See if you can get this “must appraise” stipulation removed. Start by crossing it off when you submit your counteroffer. If the agreed upon contract price is what the buyers are willing to pay, why should the opinion assigned by an appraiser jeopardize the sale? If the lender, who has been picked by the buyers, is not happy with the appraised value, it’s doubtful they will approve the loan.

The buyers can try to put you in a defensive position with, “Don’t you think your home will appraise to the selling price?” Let them know that you surely do. Point out that with this appraisal condition, the entire sale is hinging on the opinion of one person. “Who knows what the appraiser will feel is important; got up on the wrong side of the bed before performing the appraisal or subconsciously hates the style of your home or simply detests the property?”

Emphasize to the buyers that having an automatic cancellation based on this subjective evaluation is brushing aside your opinion on the value, their opinion and, if your home is listed, the opinions of the real estate agents involved.

If the buyers insist on keeping this contingency, then get the buyers to agree to a date in the near future when the appraisal should be completed and reported, rather than having this important function performed at the eleventh hour. Be sure the buyers advise the lender about this date commitment.