You’ve saved for a down payment and worked hard to get approved for a mortgage. After months of looking, you find a great house that meets your needs and fits your budget. Your offer has been accepted.
Then you receive a letter from your lender. Your dream home has appraised 10 percent lower than you anticipated based upon the price upon which you and the seller agreed. The lender is unwilling to give you the loan you need because you’re purchasing a home that’s valued at less than you’re paying, and you don’t have enough cash to increase your down payment or make up the difference. You have to walk away from your dream home, and the sellers are stuck with a home they need to sell.
The appraisal is a key part of the homebuying process. If you are buying or selling a home, here are some things you will need to know about how appraisals work.
What’s an appraisal?
An appraisal is an independent valuation of a property conducted by certified and licensed real estate professionals. Their job is to establish a value for a property based upon the best available market data. The appraisal is designed to protect the lender from extending more in a loan than the collateral—in this case, the house—is worth and to protect a buyer from paying more than the market value of the home.
Why is an appraisal necessary if the buyer and seller have agreed on a price?
Appraisals do not establish a price, they establish market value, and there are important differences between the two. A property’s value is based on a number of things, including location; physical features, such as number of bedrooms and bathrooms, age, type of construction; and economic conditions.
The price is the amount asked, offered, or paid for a property. Because of a buyer or seller’s financial capabilities, motivations, or special interests, the price paid for a property can be more or less than the actual value ascribed to that property by an appraiser.
What can sellers do to ensure an accurate appraisal?
First, price your home within market parameters. If you list your home with a price tag that is much higher than other properties that have recently sold, you stand a good chance of a low appraisal. Get professional help on pricing, and consider getting an appraisal before you list the home.
When the appraiser visits, provide him or her with a package of information that includes market information from your real estate agent and a list of all improvements and their costs. Review the lender’s appraisal when it is finished to make sure that all the basic facts are correct, including square footage, features of the home, and number of rooms. If you find mistakes, call the appraiser and ask to have them corrected.
Concentrate on building a case for the value of your home and the price you want to set with hard market data. Don’t rely on valuations from Zillow, Trulia, or other websites.
What can buyers to do avoid a low appraisal?
Ask the seller if there is a copy of a recent appraisal for you to review. Carefully review it with your agent to see if it is a fair assessment of the property value based on your research. Your agent can help you establish a fair and competitive asking price based on their knowledge of the market and the valuation of the property. That way, you won’t go under contract on a house only to find that, after your appraisal, the agreed upon price is far too high for the home and the area.
(Read more: The Risks and Benefits of Seller Financing)
Preparing well in advance is the most important thing buyers and sellers can do to prevent a low appraisal. Begin with good research on a home that includes comparable properties and the latest price data. Knowing the price of improvements, even if they are several years old, can make also make a big difference in an appraisal.
In recent years, the appraisal process has undergone several reforms to bring appraisals in line with market realities. You’ll find appraisers are eager for good information that will help them make a more accurate appraisal of the home you seek to buy or sell.
Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.