The seller of that home you are about to purchase no doubt thought long and hard about how much to ask for it. She consulted with her real estate agent who spent some time poring over statistics and the prices of recently sold homes in the area to come to a rough estimate of the home’s value.
You made your offer based on what you felt the home was worth (hopefully based on your agent’s research). When all is said and done, however, neither your opinion nor that of the seller matter. The home is worth what the appraisal says it’s worth, at least as far as your lender is concerned.
Who is the appraiser?
A professional appraiser is an unbiased third-party that is trained to determine the value of a piece of property. While not all appraisers are state-licensed, federally regulated lenders are required by law to use only those who are. Like many real estate agents that belong to a national association that adheres to strict ethics, so do many appraisers.
Are appraisers always accurate in their evaluation of homes? Usually they are, but not always. It depends on the information available to them at the time they complete the appraisal.
What affects a home appraisal?
Numerous factors can influence a home’s appraised value. Some of these include:
The national and local economies
The location of the home
The condition of the home
The value of other, similar homes that were recently sold in the area
The appearance of the home compared to those that have recently sold
Upgrades made to the home prior to the appraisal.
A day in the life of an appraisal
Let’s assume you’ve made a full-price offer on a house that is listed at $300,000. The lender will order the appraisal on the house before giving you the final decision on your loan application.
The appraiser visits the home and looks at every aspect of its exterior, from the roof to the soil. Then, she inspects the interior, from the ceiling to the floors. Finally, most appraisers measure the square footage of both the house and the lot prior to writing up the appraisal.
Back at her office, the appraiser uses the information she compiled to compare it against comparable sales nearby. She takes other facts into account as well, such as any problems with the house and any upgrades. She may also check local planning departments to ascertain if anything is planned in the nearby community that may impact the home’s future value. Finally, the appraisal is compiled and handed off to the lender.
The best news a buyer can receive is that the house appraised for more than he offered. The next best news, for both buyer and seller, is that it appraised at the offered price.
Then, there’s the worst news
A buyer typically has four choices when the appraisal comes in under the agreed-upon sale price: ask the seller to lower the price, increase the cash down payment, negotiate with the seller to pay half of the shortfall and you pay the other half, dispute the appraisal or walk away from the deal.
Sellers, on the other hand, have several choices as well. These include lowering the price of the house to meet the appraised value.
If you feel the appraisal was too low, work with your agent to find discrepancies in the report. Check that it accurately reflects the square footage, the age of the home (as well as those of comparable homes) and the number of bathrooms and bedrooms. Check the comps the appraiser used for errors regarding the home’s condition.
If you find errors, have your real estate agent contact the lender for a new appraisal. Most experienced real estate listing agents come close to the figure that the appraiser gives. Typically, it’s the homeowner that sets an unreasonably high home price and a buyer that either wants the home so much she is willing to overpay or a buyer that doesn’t do her homework and fails to research the sales prices of nearby homes.