Appraisals: A Deep Dive
Let’s talk about appraisals! An appraisal is a term that is thrown around often in real estate transactions, but we find most buyers and sellers don't understand exactly how they work or how they will affect the process of buying or selling. In today's market, appraisals have become more important than ever, and fully understanding how they function can be the linchpin to getting the home of your dreams. Let's get started answering all of your questions when it comes to appraisals.
Why does an appraisal even matter in residential real estate?
So appraisals matter when you're taking out a loan. If you're a cash buyer, you're welcome to do an appraisal if you'd like, but it’s not necessary. It is most important when you're taking out a loan, which is going to be the majority of home buyers. Really, your lender wants to know if you stop paying your mortgage on day one, this nice loan that they've decided to generously give you for a certain amount of money, they want to know if they can resell your house and recoup their investment right away. They want to know if they’re lending you the right amount of money.
What is an appraisal?
Simply put, an appraisal is a third party opinion of value on a property. The only person that can do that is an appraiser, a professional that can officially assign value. Believe it or not, realtors are not actually officially allowed to assign value. We can pull comps, tell you what we think the homes are worth, give you a range, but the official arbiters of value are appraisers. They go through a lot of training actually and get a license just like we do as realtors, to be able to do and complete these appraisals.
Who orders an appraisal?
The appraisal is technically ordered by your lender. A lot of lenders use an AMC, which means appraisal management company, so that it's an unbiased opinion. That's what we mean by a third party unrelated to the lender. In the transaction, it is your lender that will be officially initiating the appraisal and making that order.We make that distinction just because a lot of people are like, well, the appraiser works for me. I ordered the appraisal, not technically, and they're really not beholden to any of us. Their opinion is their opinion and we want to make that clear. It's an opinion of value. Different appraisers have different opinions.
What will an appraiser do?
Generally an appraiser is going to schedule a time to come to the house and have approximately a 30 minute visit. They're going to measure the home to make sure that the square footage is accurate, they'll take photos of the house, they'll assess the build quality, etc. Then a majority of the appraisal itself is done behind a desk based on data available in the MLS, which is where all of the listings are.
Appraisers spend a lot of hours behind the desk looking at comps and the pictures online to determine how this home compares to others that have sold. They're going to make adjustments to the price based on features that add or remove value. So does it have a nice built-in kitchen outdoors? They're going to add and allocate a certain amount of value to that. They make a lot of micro adjustments that are very refined to make sure that they needle that price right where they want it to be. Using all of those adjustments they will come up with their assessed value. When that price comes in we really get into the nitty gritty of how they arrived at that.
How long does an appraisal take and how much does it cost?
As you can imagine, since the real estate market is really busy, appraisers are really busy. We're seeing them take around three weeks to come back. The average cost is around $500, but can be even more right now, depending on the availability of appraisers, who we need to get out to the property, and how quickly we don't need to order a rush appraisal. In a situation where you don't want to delay when you get the keys to your home, this is going to be the big holdup in terms of timing right now when you're under contract. With that being said, the appraisal is done after you're under contract on a property. A lot of times we don't want to order it or spend that money until we're done with the option period, but it has to be completed before closing because they need to have it to issue your loan. We're always threading the needle on timing with an appraisal.
What happens if the appraisal comes back higher than the contract price?
First of all, the contract in the state of Texas allows for a financing contingency, which most buyers use if they're getting a loan. That means that if the lender cannot issue the loan for some reason, then the buyer can walk away and is not obligated to buy the house. So we basically want to know if the house is worth what you can pay for it. There's kind of an umbrella when you think about the financing contingency, they're looking at both your ability to pay as a buyer and then this house, is it actually worth what they’re asking. So if the house isn't worth the amount of the loan that the lender was going to issue you, we have a few different options.
Option #1 Our first and favorite is that we're just going to ask the seller to lower the contract price to the appraised value. Unfortunately this is a seller’s market and more often than not the seller says no.
Option #2 The buyer comes up with cash equal to the shortfall. The lender just lowers that loan amount and you pay the rest in cash.
Option #3 We're going to negotiate to meet somewhere in the middle. Maybe they come down a little bit, you come up a little bit, and we meet in the middle to figure out the shortfall.
What is an Appraisal Waiver and what are you options?
As your agent we’re trying to make sure we are competitive on all terms to really get you into your dream home. There’s something called an appraisal waiver that we’re seeing much more commonly lately, which gives you some options and the seller some reassurance. It’s basically saying the offer you are giving stands regardless of the appraisal, which as you can imagine would be very appealing for a seller when there are multiple offers on the table. Not including one means you’ll most likely be going back to the negotiation table later in the contract period, making your offer much more risky. Keep in mind FHA loans technically cannot use an appraisal waiver. You have two options when using an appraisal waiver.
Option #1 Waive that appraisal contingency entirely. This essentially means you’ll figure out how to make up the difference with your lender if the appraisal comes in low and the seller doesn’t have to deal with any of that.
Option #2 Waive the appraisal contingency partially. Outlining the amount of money you can additionally put towards that loan and negotiating with the seller if the appraisal comes in lower.
Appraisal Waivers Give Lower Offers An Edge
The most important thing that we want you to walk away with is that we have seen sellers many times accept lower offers, not the highest offer, because the lower offer has an appraisal waiver and gives them the confidence that they're not going back to the negotiating table in the case of a low appraisal. It's why the market is so competitive right now. Cash is king at the end of the day, so if you have some cash, it definitely can help you in competition. We really hope we helped you understand more about the way appraisals play into the dynamics of the real estate transaction. If you have any additional questions, please reach out. We are happy to help! Head on over to WhereWeLivePodcast.com to continue the conversation in our Facebook group, listen to more episodes, and connect with us.
Until Next Time,
Brianna & Keelie