Real Estate Appraisals - What You Should Know

Real estate appraisals are very common in a traditional residential real estate transaction.  An appraisal is a valuation of a piece of property by a licensed appraiser based (typically) on recent sales and market conditions, and sometimes from an investment/income approach or a cost approach.  For the purposes of this article, 

In a market where prices are quickly changing - whether in a recession or a strong Seller’s market - is not at all uncommon for appraised values to be different from a negotiated contract price. 

In a strong Seller’s market, many Sellers will insist that the Buyer waive their appraisal contingency.  An appraisal contingency is the mechanism by which the Buyer can cancel the transaction or attempt to renegotiate the purchase price, if the appraised value is less than the contract price.

So what happens if an appraiser values the property for a different price than what the Buyer and Seller have agreed upon?  If the Buyer has removed their appraisal contingency, then the Buyer must proceed with purchasing the property at the original price, and will need to make up the difference in cash or walk away from the contract and lose their earnest money deposit.

If the Buyer was able to negotiate to include the appraisal contingency in the contract, then the Buyer has a number of options, including:

1. Appeal the appraisal by either identifying errors in the appraisal or providing different comparable sales than the sales referenced in the appraisal.

2. Attempt to renegotiate the price with the Seller.

3. Cancel the transaction.

From both the Buyer and Seller’s perspective, the appraisal can be a wildcard, particularly since a 3rd party has so much control over the outcome of the transaction.

There are a number of tools that we as agents use on our listings to help the appraiser justify the contract price of a transaction, and additional tools we use as Buyer’s agents to protect our clients from being in a situation where they aren’t protected against a low appraisal.

The more educated that you are as either a Buyer or Seller your options, the better equipped you will be to navigate transactions.  That’s why we’re here to guide you every step of the way!

For more information on appraisals and the market in general, give Kate a call at (619) 933-5319!