12 Weeks to Buying or Selling a Home: Week 6
A Real Estate Series
Welcome back for Week 6! You have now stuck around long enough to hear about the approval process, listing process, and how to handle inspections. Now let’s discuss how the appraisal process works and what to expect. We will stick to our format from Week 5 where I combine this topic for both buyers and sellers. Let’s go!
What is an appraisal?
To start off this week, we need to first identify exactly what an appraisal is and when it must be done. An appraisal is simply an expert’s evaluation and estimate of the value of a property. This expert is called an appraiser and banks use them to determine if the money they are loaning a buyer is covered by the value of the home. Basically, banks want to cover their butts and make sure if the buyer happens to foreclose on the property, they can get their money back. So who needs an appraisal? Buyers who are using a lender to fund their loan. Appraisals are NOT necessary for cash buyers unless they just feel the need to have one completed, but if they do, this will be an extra cost to them. This is one of the many reasons cash deals are so appealing to sellers - there is typically no appraisal process to hold up closing.
What happens if the value comes in low on the appraisal?
Let’s say the purchase agreement shows an agreed upon sale price of $450,000 and an appraiser gives a value of $425,000 for the home. What this means is that the lender will ONLY loan the $425,000 to the buyer, so that leaves $25,000 left to negotiate. There are a few ways to handle this:
The seller can reduce the sale price to $425,000.
The buyer can bring $25,000 in cash to the table to make up the difference.
The seller and buyer can reach a mutual agreement of some sort where the seller reduces the price and the buyer brings some cash to the table.
Get a 2nd appraisal/opinion.
Now I know this sounds super scary, right? Most buyers don’t have an extra $25,000 laying around, and most sellers don’t want to cut their profit by that much either. This is why appraisals can be one of the top deal breakers. However, if the sellers are motivated and the buyers are dead set on buying the home, a compromise can be made with some thought and good agents to back you up in negotiations. Just be aware that option 4 (a 2nd opinion) is going to cost more time and money and is not guaranteed to give the outcome both parties desire.
Can a buyer walk away and get their Earnest Money back if the appraisal is low?
Yes. This is one of several ways the buyer can walk away from the deal and have their Earnest Money returned. Other ways are inspection items that cannot be agreed upon and financing that falls through. Make sure your agent fights hard to get your money back for you! I have heard of buyers losing their money far too many times when it should have been returned to them.
What other items may come up on an appraisal report?
It is a rare occurrence with Conventional Loans to have appraiser required repairs that must be completed before closing, but this is a very common occurrence with FHA and especially VA Loans. Items like chipping or peeling paint, lack of handrails on a porch, broken windows or siding, etc. are all repair items that we see frequently placed into appraiser reports for these types of loans. When an appraiser requires specific repairs for a home, the loan simply WILL NOT close until these items have been fixed. Most of the time these are fairly minor and inexpensive repairs, but someone will have to pay for them (typically the seller). It is important that you and your agent are aware of the requirements for these types of loans and that you are on the lookout for these potential issues before listing your home or putting an offer in on a home. Once the repairs are completed, the appraiser then has to come back out to the property and sign off that the work has been done. It is important to keep in mind that these things add time to the entire process, and your closing date may be delayed!
As a seller, should I take a cash offer over the others to avoid an appraisal?
This is not an easy question to answer. Yes, cash deals have some benefits like a short closing period (typically less than 3 weeks) and usually no appraisal. But you may be trading that for a higher purchase price in the end. It really all depends on what your specific goals are and how each offer fits with those goals! Your real estate agent should be able to walk you through the benefits and downsides to every offer you receive and help you come to a decision on which works best for you.
There you have it! That is the short version of what an appraisal is and how to work through it during a deal. Yes they can be major deal breakers, but as always, if you choose an agent who knows their “stuff” you can get through almost anything! I hope you found this information helpful and check back next time for Week 7 where we talk about things buyers should and should NOT do during the loan approval process and how sellers can juggle both selling and buying a new home at the same time. Get ready because this will be a jam packed lesson for you all!
About the Content Creator:
Courtney Burke is a real estate agent and co-owner of Welcome Home Realty Group, LLC located in Franklin, Indiana. She spent 9 years as a Biology teacher at Franklin Community High School but left teaching in 2021 to pursue a career in real estate alongside her husband, Chris Burke, who has been in the business since 2014. She uses her background in teaching to educate her clients on the steps to home buying, selling, and investing and help them reach their goals.
For more information, contact Courtney at 317-416-3073. You can also visit her website at www.whindiana.com.
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