Part of the home buying process is the appraisal. Some agents refer to the appraisal as the last hurtle in the under contract process. Is the appraisal important in the real estate transaction? The answer in a word is, YES! The value of the appraisal can mean the difference between the house selling to a particular buyer or not.

What is an appraisal?

Let’s go over what an appraisal is and details about it. An appraisal is one person’s opinion on the value of a property. It is required by the lender most of the time, if the buyer is getting a loan. Sometimes if the buyer is putting a significant amount down, over 40%, the lender may not requiring an appraisal. A buyer that is paying cash for a property, may decide to get an appraisal just to make sure the price they are paying is fair. The appraisal is ordered by the lender or buyer if paying cash. Once the property has been viewed by the appraiser, the appraiser compares the subject property to others. The appraiser prepares a report and offers an opinion of the value of the property. Most of the time that value is the same as the contract price. But, what happens if it isn’t?

Appraisal is high

If the value of the property is higher, it can make the buyer feel like they got a “deal” on the home. Nothing changes. There is no price increase. The buyer does not have to pay more for the home. They purchase the home feeling like they have a little bit of equity already.

Appraisal is low

If the appraisal comes in below the contract price, there are several options. The buyer can bring the difference to closing and go ahead and close. What does that mean? Let’s say the buyer is under contract on a property priced at $500,000 and the appraisal comes in at $490,000. The buyer can pay the difference in the gap between the two numbers. Meaning, the buyer can bring an additional $10,000 that is not being used as their down payment to closing to cover the gap. If that is not possible, what else can happen? Another option is the seller can agree to sell the home for $390,000. Or also the buyer can choose to walk away from the home without penalty.

Contesting the appraisal

There is one final option for the buyer. This option involves contesting the value/opinion of the appraisal and asking that the appraisal be reviewed. This process is called a reconsideration of value. Often times, in order to have this done, the buyer or their agent needs to find errors in the appraisal. Another possibility is to note that the appraiser did not include important information. It is not common that this leads to a change in the appraised price. Remember, it is the opinion of the appraiser. Most people do not change their opinion.

As you can see, the appraisal is an important part of the process of purchasing a home. If the appraisal does not come in at the contract price, it can be a stumbling block in the transaction. This may be too significant to overcome and can mean the buyer is not able to purchase the home. There is not much that can be done to avoid problems. Involve your agent in determining the price that you arrive at in your offer. Make sure that your agent has comparable properties that can be provided to the appraiser if needed. Know that problems occur very infrequently. Hold your breath and hope it doesn’t happen to you.