You’ve been saving for months, and you’re finally ready to buy the home of your dreams. You’ve scoured online listings and narrowed your search down to the best neighborhoods. Finally, while touring one of the homes, you know you’ve found the one! So you worked with your real estate agent to put in an offer and went to start packing your belongings.
But don’t schedule the moving truck just yet. There’s another crucial step in the process, called the appraisal. An appraisal is a determination of the value of the property, made by a professional appraiser. The lender will only approve loans for homes that appraise for the full sale price or more. It’s a form of protection for the lender, as the home serves as collateral. Think of it this way: If the bank had to foreclose on a home, it would sell the home to repay the loan. If the loan amount was $200,000, but the house was only worth $150,000, the bank would be out $50,000.
The appraisal protects you as a buyer as well. If you put in an offer for $150,000, but the estimate shows the home’s value to be $175,000, you’ve already gained $25,000 in equity. Similarly, you don’t want to overpay. For these reasons, your real estate agent may recommend you place a contingency in the offer that allows you to withdraw the offer after the appraisal.
How does the whole process work? Your lender will choose an appraiser for you, and once you pay the fee (typically $300–$400), he will inspect the property. Location, square footage, number of bedrooms and bathrooms, improvements, and age all play a role in determining the value. There are other factors that can contribute to the value, like proximity to a good school district. The appraiser compares the property to similar ones to determine the value.
If the appraised value is greater than the loan amount, you’re in a great place to move forward with the transaction! If the value is lower than expected, you can withdraw your offer if it was contingent on the appraisal.
If you loved the home, you do have the option to buy it. Your real estate agent can challenge the assessment, or you could pay for a second appraisal, at the risk of the value not changing. If the seller is motivated, she may work with you to renegotiate the sales price or agree to pay the difference between the appraised value and the sales price. Your last option is to pay the difference in cash, and the home is yours.
If you still have questions about the appraisal process, contact your real estate agent at Latter & Blum, Inc. for assistance.