How An Appraisal Can Make or Break a Sale

No home sale is ever final until its actually closed and recorded. That is a fact and explains why listings say “Pending” and not “Sold” after an offer is accepted.

There’s a lot that goes on after a buyer’s offer is accepted by the seller. And a key factor in getting to closing day is the home appraisal by the lender.

When a buyer has a financing contingency, if the appraised value of a home comes in below the contract price, it could cause the sale to fall through. No new home for the buyer and no final sale for the seller.

This happens even in the Puget Sound area despite multiple offers.  Sometimes the price gets pushed up more than what the recent area sales would support the value of the home.

What can you — as a buyer or seller — do to prevent a low appraisal or, in the event of a low appraisal despite doing everything right, still have the sale go through? Read the strategies and insights below and prepare for one of the most important yet overlooked part of a home sale—the appraisal.

Home Appraisal 101

First, let’s discuss the basics of the appraisal process—what it is and why it’s a necessary step as part of a purchase.

A lender needs to make sure that the money they are loaning for a home could be recouped if the borrower stops paying the mortgage.   

To that end, the lender will hire a licensed appraiser to visit the home and do two things.  One, the appraiser needs to make sure the home is habitable and two, the appraiser tours the home to make notes about how it compares with the other homes that have recently sold nearby.  These homes are called comparable or “comps” for short.

Then, the appraiser will look at the comparable sales over the last six months to help determine the current market value of the home that someone is buying. The valuation is also based on market trends, supply and demand, time on market, and takes in consideration any extenuating factors such as upgrades or something like being on a higher floor or end unit. 

Since it’s never an “apple-to-apple” comparison, the appraiser will make adjustments to the appraisal for some features of a home — a finished basement, a coveted view, updated appliances or HVAC systems. Remember, however, some improvements don’t add as much value as you would like … such as new curtains, landscaping, etc.

For a condo unit, an appraiser will consider the number of units in the condominium community, how many are on the market and how many were sold.  The most weight is given to homes that have sold in the same building or the same neighborhood. 

Appraisal Law Changes Process

The appraisal process went through a change a few years back when the Home Valuation Code of Conduct was passed. This law was meant to make appraisers more independent and not “hired” by the real estate agents, buyer, seller, or bank handling the transaction. Lenders don’t select the appraiser, appraisal request now go into a blind pool, and appraisers can select the jobs they’d like to perform. Because of this system, some appraisers may not be local to the area where they are appraising homes.

There’s been some questioning of how well these appraisers know the neighborhoods and the “true” value of a home when an appraisal comes in too low.

What a Buyer Can Do

If an appraisal comes in low, it’s not the end of the transaction. It does change the amount the lender will loan the buyer which will impact either the buyer or the seller or both.

For instance, a buyer wrote a contract to purchase a home for $1,000,000 and is planning to borrow 80% ($800,000) and to put 20% down ($200,000). However, if the appraisal comes in at $950,000, the bank will only lend $760,000, not $800,000 (80% of $950,000).

If you’ve made an offer on a home you love but the appraisal comes in low, the financing contingency allows you several options.

1. Notify the Seller of the low appraisal. If you notify the Seller of the low appraisal, they have 4 choices which I’ll review below.
2. Don’t notify the Seller of the low appraisal and pay more down payment. The lender will still loan the reduced amount; you just need to put a little more down. In the example above, the loan would be $760,000, not $800,000 and the down payment would go up from $200,000 to $240,000. The monthly payment would go down since you’d be borrowing less.

Remember, the seller wants to sell their home. Even though they would love the higher contract price, they may have to renegotiate with you.

What a Seller Can Do

Before the appraisal, make sure the appraiser has the best information before they prepare their appraisal report. Provide details on any home improvements to the appraiser so nothing is missed. Your broker can contact the lender so they can connect with the appraiser who is hired to evaluate your home.

If you’ve got an all-cash buyer, you won’t have to deal with a bank or appraisals at all. That’s a big plus as a seller.

If the appraisal comes in below purchase price and the Buyers officially notify the Sellers, they must provide a copy of the appraisal to the Seller. The Sellers have 4 options.

1. Lower the purchase price to the appraised value. If so, the process moves forward to closing.
2. Partially lower the purchase price.
3. Don’t lower the price at all.
4. (this one never works) Appeal the appraisal for a reconsideration of the value of the home, or ask for another appraisal. The Seller would have to pay for it. However, I’ve NEVER seen this work unless they actually evaluated the wrong property (it happened). Appraisers dig their heels in and never adjust their report. If you ask, it’s like they get more determined to justify their low value. Plus, if it’s an FHA loan, an appraisal stays with that home for 6 months so you can’t ask to switch lenders or get a new appraisal.

If the Seller choose 2 or 3, the Buyers have two contractual choices, and one strategic choice:

1. Terminate the agreement and get their earnest money back.
2. They can put more money down than planned and continue to closing.
3. Switch lenders to start over again with a new appraiser. However, switching lenders at this point might delay closing and the Seller is under no obligation to agree to this.

As you can see, a lot goes on “behind the scenes” during the appraisal.  The good news is that both buyers and sellers have options to continue the sale if the appraisal comes in too. 

This part of the home buying and selling process can feel mysterious and overwhelming, but that’s what I’m here for!  An appraisal report is somewhat complicated. If you’d like to see what one looks like, let me know. Email me gretchen@metropolilst.com and we can talk more about it so you understand things fully.  It’s never too early to start!  Plus, understanding the process makes moving forward a whole lot less nerve-racking once you are ready.  I’m looking forward to hearing from you and helping you.