First of all, What is a HOME APPRAISAL?
Appraisals are basically the bank getting a little verification that the price you’re trying to pay for the home, and the condition of the home are acceptable to them. It’s basically a risk analysis for the bank to make sure that they’re not over-lending on a property, which could risk foreclosure. And they’re making sure that the home itself, isn’t going to be a safety hazard for the homeowner or cause issues in the future. So what do you need to know that could go wrong during the appraisal process? There’s the only a couple of things and they’re fairly rare, but I just want to point out to dispel any fears you might have.
Number one is the price could come in low. So let’s say you’re paying $350,000 for a home. And if that price comes back on the appraisal, for an appraised value of, let’s say $340,000, you’re then short by about $10,000.
Now the seller, first of all, is not obligated to lower the price, from the $350K to the $340K, and agree to sell it for the lower amount. But on the flip side, the buyer’s also not obligated to pay more than the appraised value and the lender won’t lend based on the $350K, if the appraised value is $340K.
So if the seller is not obligated to come down, and the buyer doesn’t have to come up, there are really two options that we could explore. Ideally, we`d want to meet in the middle. So if the buyer’s has an extra $5,000 in cash, they can bring that $5,000 to closing. And then the seller would come down on their sale price by five grand, we would then sell it for $345K with the buyer agreeing to pay five grand over, which the bank would then accept.
Typically, however, in addition to the buyer’s down payment and the are other closing costs, buyers often don’t have enough money to bring on top, to bring that $5,000 extra to closing.
So it is a pretty common scenario, that the seller will have to reduce the price, to the appraised value. Again, they’re not obligated to do this, but if they want the home to sell, which they always do, they really are often not going to have any other choice. Number two is regarding the condition of a property. And that’s why at the beginning of the transaction when I’m working with a seller, we have a lot of conversations about the types of financing that we’re looking at. Coming in from the buyers, FHA is a lot more difficult, more likely to have issues.
They have a higher standard for different things.
Conventional loans, for example, are much easier, a little more lax on the condition of the property has to be in. So we’ll have that conversation in advance, any help. But let’s say an issue does come up, a few common things that could come up with the home. If it’s an FHA, for example, if there are no smoke alarms and CO detectors in the appropriate places, that could become an issue.
If there’s a cracked pane of glass, for example, it doesn’t really affect things. We’ve probably already addressed it in the purchase agreement, but that could be an issue for the banks as well.
Or there could be more major things like if recently, actually, I just had probably the biggest appraisal issues I’ve had come up. The bank required that a railing get put on a deck, in that scenario the deck was only two or three feet off the ground, but in the criteria of the lender, it’s the same difference to them as if it was 20 feet off the ground. And so in that case, they required that a railing get put on the deck, prior to closing.
So then how do we resolve the issue? It’s just like with my first point, we’re going to try and get the buyer and seller to meet to a middle ground. Ultimately, neither one of them is causing the appraisal issue, it’s the bank’s standard that they’ve come up with. And so we need to find a middle ground that works for both parties. With the railing that I had recently, in that scenario, the seller basically paid for the new railing, if the buyer was willing to do the work, to put the railing in.
So it was a great scenario.
The buyers were handy, the sellers weren’t, but they had the money, they were willing to do it. So we can come to a middle ground with something like that. That’s what we would do with a major issue. Typically, you know, most common is a smoke alarm or something minor like that.
Typically the sellers will just deal with it. And then once the issues are taken care of, we’ll then have the appraisal back out. And they’ll confirm that everything’s done, and we’ll go clear to close. Again, I want to remind you, it’s actually pretty rare that we have any real major appraisal issues that come up, but it is a concern for some people.