Claudette Millettte of The Buyer’s Council has great advice for home buyers about the appraisal needed by the lender.
A crucial step in home buying is the home appraisal. This is part of the mortgage process and must be done as soon as you are ready to proceed with your loan. Following your home inspection you should give the “go-ahead” to your bank to send out an appraiser.
But, what if the home does not appraise for the offer price?
If the property you are planning on purchasing is unique or there have simply not been many sales of similar homes in the area, arriving at a fair offer price can sometimes be a challenge.
In a slow or declining market there may not have been many sales of similar homes in the town you are looking in. This factor could also have an effect on the appraisal outcome.
To arrive at an offer price, your buyer agent should have put together an analysis for you of all of the homes in the area that have sold, preferably within a mile of the home and within the past three to six months. These homes will have a similar square footage and be in the same age range, i.e., a newly constructed home is not a comparable sale for a home that was built in 1952.
As a precautionary measure, I also usually put in the offer to purchase that home “must appraise for the sale price.” This acts as an insurance policy that the analysis that I have done on the property is accurate. It also gives you as a buyer the option of withdrawing from the transaction if the appraisal comes in lower than the price you have agreed to pay.
Additionally, it gives you some leverage to renegotiate the sale price with the seller. If the seller feels that you can and may walk away there will be some pressure to lower the price to the appraisal amount.
You should keep in mind, however, that no one is infallible and a property appraisal is not an exact science. At best, it is an attempt to determine what the home is worth based on a number of different evaluation methods. This is usually done by the “Sales Comparison Approach” comparing your home with sales of similar properties. This method is subjective since no two homes are exactly alike.
In the event that the appraisal does not come in at the sale price you could get a second opinion. It is possible that the appraiser did not use the most appropriate comparable sales for the home. They could be challenged. A second appraiser may have a different valuation.
If the contract price for the home you are buying is $600,000 and the appraisal comes in at $595,000 does that mean you should walk away? Not necessarily, but with the “property must appraise” phrase contained in the offer you at least have options.
You can make the decision to proceed with purchase, renegotiate with the seller or choose to get out of the transaction completely with your deposit refunded.
This post was written by
Claudette Millette, Broker, Owner, The Buyers’ Counsel – (508) 881-6230
An Exclusive Buyer Brokerage serving the Greater Metrowest area