You've finally got an accepted offer on your dream house but just because you and the seller agreed on a price, doesn't mean it's a done deal. If you're getting a loan to buy your house, the lender will require that you get an appraisal. An appraisal is when an independent party visits the home to determine its value.
The lender will ask you to pay for the appraisal report, which usually costs less than $500 for a single-family home.
Who does the appraisal?
The Licensed Residential Real Estate Appraiser who creates the appraisal report will have completed many hours of education followed by a training period. Massachusetts, for example, requires over 150 hours of course time plus 2000 hours of on-the-job experience.
How do they get the value?
The licensed appraiser will visit the home and then search MLS for similar properties that have sold in the area. They will contact the selling agents of similar houses that are under agreement since the selling price of those will not be publicly available. They will then add or subtract from the value of the comparable properties to account for differences and come up with a price that they think the house is worth. For example, if a place down the street that looks a lot like yours sold for $200k but it has 1 bathroom and yours has 2, the appraiser may take the $200k and add some money to it to get a comparable value for your house. The amount that gets added will depend on area statistics for the extra bath or whatever other feature differences - like
the condition, the square footage, location, and any additions or renovations - that exist between the homes used in the comparison.
Does the value always match the agreed price?
Unfortunately, no. Sometimes an appraisal can come in lower than the price that you determined with the seller. Some areas don't have a lot of sales so it's a bit harder to determine value. Sometimes the appraiser isn't that familiar with the neighborhood and has used comparable properties that are from a lower-priced part of town. Ask to see a copy of the appraisal report. Read it over and share a copy with your real estate agent. Make sure that nothing was missed, like the extra bath example above. If you find something that doesn't look quite right, ask the lender for an update to the report.
What happens if the value is lower?
The bank will only lend on the appraised value so you'd have to pay the difference between the agreed price and the appraised value. For example, if you agreed with the seller to pay $200k and the appraisal report says the house is only worth $180k, you could potentially have to pay an additional $20k up front to buy the home.
What can I do?
A good first step is to ask your agent to go back to the sellers and let them know that the appraisal came back lower than the agreed price. In many cases, the seller will either drop the price to the appraised value or offer to split the difference with you. In the above example, that would mean that you're now paying $190k. The bank will give you a loan based on $180k so you'll owe whatever your downpayment was plus $10k at the closing. If you don't have an extra $10k, you can cancel the purchase and get a refund of your earnest money deposit. You can also request a new appraisal but that doesn't always turn out the way you want.
Normally, the appraisal process goes smoothly and the home valuation is on par with your offer. In the rare cases where the value is lower, most sellers are willing to negotiate. No matter what, ask the bank for a copy of the appraisal report. You are legally entitled to it and it's a great and very informative document.
If you have questions or concerns along the way, your real estate agent is a great resource.
Here is some other info from Realtor.com, QuickenLoans and Investopedia.
Start this series at the beginning.
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