In order to determine the appraised value of a home, the appraiser compares the subject property with similar homes that have sold recently in the same area. Relevant information includes, physical, legal, and economic characteristics. It should be noted that not all characteristics of a home are necessarily relevant and may not affect the value of a home. Relevancy is determined by the appraiser.
The best case scenario is when the property appraises for more than the purchase price. When that happens you can pat yourself on the back for being an astute buyer who got a great deal! However, if the appraisal is lower than the accepted purchase price you have three options.
- If the buyer has extra cash available, he/she can make-up the difference between the appraised value and the purchase price and bring those additional funds to the closing.
- The buyer and buyer’s agent can renegotiate the purchase price by asking the seller to lower the price to meet the appraisal or to contribute towards the difference.
- The buyer can walk away from the deal and search for another home.
Let’s revisit the idea that understanding appraisals can benefit the buyer when making an offer. In this market, with more buyers than there are homes for sale, a buyer can write an appraisal shortfall guarantee into their offer. This requires that the buyer has available cash to cover all closing costs plus the extra for the shortfall guarantee. Let’s look at an actual transaction that I closed recently.
The house was listed for $220,000 and my buyers placed an offer of $240,000 with a $15,000 appraisal guarantee. This means that if the house appraised for less than $240,000 my buyers would make up the difference in cash at closing. In this case there were five offers and my client’s was not the highest. However, by speaking with the listing agent in advance I knew in advance that an appraisal short-fall guarantee was important to the seller. They did not want to be in a position to renegotiate the purchase price like in example #2 above. In this case the home did appraise at the full value of $240,000 which was amazing for my clients who not only won the deal and in the end did not have to bring extra cash to close.
As always it is important to work with a professional realtor who understands and can guide you through the buying process. Please reach out with any questions about appraisals or any other part of the home-buying process.