For a lot of buyers and sellers, negotiating a contract, dealing with the back-and-forth of numbers and contingencies feels like the final word when it’s all over with and everyone agrees to terms and conditions.
But for buyers getting a loan, and sellers working with those buyers, it’s far from over.
When buyers go to a lender to get pre-approved for a mortgage, the lender is asking themselves if the borrower has Capital, is Credit Worthy, has the Capacity for repayment, and will have any Collateral (remember the Four C’s of credit?)
The lender, upon satisfaction of those criteria has a final hurdle, too, and that’s the appraisal.
When a buyer finds the right house, the buyer and lender have already decided that the borrower is good for a loan…but no lender will loan on just any and all types of property. If you are pre-approved for a loan, that doesn’t mean you can buy whatever you want in your price range. The lender has a stake in what you purchase (and typically shareholders to report to), and they want a third-party assurance that the property under consideration is worth the money being loaned.
That’s where an appraiser comes in.
Appraisers are licensed at the state-level, and are called upon by lenders to perform appraisals to be sure that the negotiated price between the seller and potential buyer is in line with the current and near-past market conditions. Appraisers are neutral third-parties that lenders hires to be sure that the price you and the seller have agreed to (and that they are lending on), is worth it…if you fail to make payments, and go into foreclosure, the bank takes your house back. And then it gets resold, but they can’t resell it if more than market-price was paid.
The crazy thing? YOU pay for the appraisal! It is required by the lender, but you cannot find you own appraiser, negotiate the price or even schedule the date and time that it happens. The lender handles all the details. But you will pay for that as a line item on you HUD-1 Closing statement.
Appraisers often work for themselves or small firms and used to have tight relationships with local lenders. New regulations have nearly ended that cozy relationship as poor or overinflated appraisal prices were blamed in part for the housing meltdown (for years, all the appraisals done for my buyers curiously came out to exactly the price being offered…what are the chances?). Now, appraisers have been know to come from far outside their geographical area of expertise to comment on properties and areas that they have limited or no sense of in terms of local issues, quirks, and the usual-and-normal.
When appraisers put together a valuation for a lender, they are looking at what is standard for the area, typical for modern living (is it still being heated by a wood stove?), comparing the property to other like-properties in terms of location, style, size, amenities, etc. They are looking at past recent-sales data and mixing it all together to try to get an idea of what the market says the house is worth…not the buyer and seller.
What Happens When The Appraisal is HIGHER Than the Sales Price?
When a seller puts a home on the market, hopefully, they are getting good advice from an agent about market-driven pricing parameters. When a buyer and seller agree upon a final price, and an appraisal is completed with the value showing for LESS than that price…it’s a problem. The bank will not loan more money than the appraisal says it’s worth; the seller wants the amount that the buyer agreed upon, and the buyer presumably wants to buy. When there is a shortfall, there are only 3 options: a) the buyer walks away, b) the seller reduces the price or c) the buyer adds more money to make up the difference.
A home appraisal is typically arranged between the lender and the seller. They take several hours to put together, and start with a physical inspection of the property. Appraisers are looking at the features that make the house what it is…and comparing those features with what is typical for the area, how much, say, an extra half-bath costs, and the general condition of the property. A screened-in porch is standard fare in the south, while mudrooms tend to be more common in New England, for example. Very old homes may have no closets or tiny closets making them functionally obsolete (that’s when something works, or is available, but isn’t up to modern standards: not having a bath on the first floor, or having to get to the basement only through an outside entrance are two examples). Each of these things effects value.
Once the paperwork is done, the appraisal becomes the property of the lender, NOT the buyer, and it must often be specifically requested by the buyer. Even then, if it is released to a buyer, it is usually only presented at closing as part of the stack of copies you get at closing (imagine a buyer finding out that a property was appraised for thousands LESS than they were paying). Be sure you request a copy early, before closing.
Appraisers used to be an after-thought by agents negotiating a sale, and barely thought of at all by buyers and sellers. With the new, stricter laws surrounding how, when, where and how much can be charged for appraisers, who can arrange then and under what conditions, the landscape is much more complicated. Buyers and sellers should be aware that for anyone getting a loan? The appraiser has the final say.