“There have been few things in my life which have had a more genial effect on my mind than the possession of a piece of land.”
—Harriet Martineau, sociologist
You’ve found the home you love, had your offer accepted, and even locked in a mortgage! Time to break out the Dom Pérignon White Gold? Sorry, not yet. If you’ve applied for a mortgage, your home-to-be still has to undergo a home appraisal. Lenders require this to know that the money they’re loaning you is heading to a sound investment. In fact, an unfavorable appraisal can kill a deal. Yikes! It can be a nerve-racking ordeal, but it’s actually good for you. Honest. Allow us to demystify the process.
Appraisals estimate a home’s value with fresh eyes
While the home appraisal process is a process that is somewhat similar to getting comps—as you did to determine a fair price—appraisers delve in, in much more detail, to determine the home’s value. They’ll investigate the condition, the square footage, location, and any additions or renovations. Another key difference is that when you looked at the comps, you were probably hoping for a specific outcome— perhaps even some flaw that you could use as a bargaining chip to lower the price. Appraisers, on the other hand, are trained to be unbiased, says Adam Wiener, the founder of Aladdin Appraisal in Auburndale, MA. “I don’t care what anybody wants the home to be worth,” he says. “I’ll give you the answer. You may not like it, but it’s the answer.”
You’ll get a copy of the appraisal, too
Appraisers set out to determine if the home is actually worth what you’re planning to pay. You might be surprised how little time that takes; they could be in and out of a home in 30 minutes, and that’s not a reason to panic. Appraisers aren’t home inspectors, who examine every little detail. While they’ll pay particular attention to problems with the foundation and roof, the home appraisal process includes noting the quality and condition of the appliances, plumbing, flooring, and electrical system. With data in hand, they make their final assessment and give their report to the lender. The mortgage company is then required by law to give a copy of the appraisal to you.
Appraisers work for your lender—not you
As the buyer, you’ll be paying for the home appraisal. In most cases, the fee is wrapped into your closing costs and will set you back only $500 to $700. However, just because you pay doesn’t mean you’re the client. “My client is the lender, not the buyer,” Wiener says. This ensures that appraisers remain ethical—in fact, it’s a crime to coerce or put any pressure on an appraiser to hit a certain value. Appraisers must remain independent. “Anything less, and public trust in the appraisal is lost,” says Wiener.
They still protect buyers from a bad deal
In essence, the home appraisal process is meant to protect you (and the lender) from a bad purchase. For instance: If the appraisal comes in higher than the price you’d agreed to pay, it’s generally fine. Sure, the sellers could decide they want more money and would rather put their home back on the market, but in most cases, the deal will go through as expected. If your appraisal comes in at a price lower than what you have offered, this is where things get tricky: Your lender won’t pony up more money than the appraised price. So if you and the sellers agree on $225,000 but the appraisal comes in at $205,000, it creates a $20,000 shortfall. What’s a buyer to do? Read on.
Appraisal came in low? What to do
The homebuying process is a high-stakes thrill ride full of exhilarating ups and scary downs, but unquestionably one of the most deflating moments is when the appraisal comes in significantly lower than the accepted offer. So, what do you do if this happens to you? You have four options:
1. Appeal the appraisal
Sometimes called a “rebuttal of value,” the appraisal appeal takes some work. In fact, it’s a total team effort. “The homeowner, loan officer, and often the real estate agent work together to find better comparable market data to justify a higher valuation,” says mortgage adviser Casey Fleming. That means everyone puts on their best Sherlock Holmes garb and gets to work looking for anything that supports the claim for a higher valuation. Perhaps the appraiser overlooked some comps (homes similar in style, location, and square footage, sold within the past few years).
“It’s not uncommon to discover, for instance, that the appraiser used a comparable sale that looks like it’s in great condition, when, in fact, the home was trashed when purchased and has already been rehabilitated,” Fleming says. The loan officer writes an appeal using the new comparables and then sends it to the appraiser. There might be some negotiating back and forth until all parties agree on a compromise and a new valuation.
2. Get a second appraisal
“Most often, if the appraised value is not as high as the agreed price, the seller’s agent will ask to see the comps and get a second or third appraisal,” says Diane Saatchi, a senior broker with Saunders & Associates in Bridgehampton, NY. But it will cost you—you’re paying for all of those additional appraisals as well. They can range between a few hundred dollars and $1,000, depending on the area. Occasionally, real estate agents or sellers will foot the bill if they really want to keep the sale.
3. Negotiate with the seller
If you’re lucky, both you and the seller will budge a little. “You might go back to the sellers and ask them to reduce the price or split the difference,” says Peter Grabel, managing director of Luxury Mortgage in Stamford, CT. “The seller is under no obligation to do so, but they may prefer to do this rather than take a chance of losing you as a buyer, and starting over again. It is likely that another buyer will have the same issue, so the sellers might be better off renegotiating with you, unless they have other offers.”
Sellers might be more willing to cooperate, especially if the Federal Housing Administration is involved. Lenders often require the use of their own FHA-approved appraiser, and these appraisals are “locked in” for six months. “The seller could be forced to take a poor appraisal or wait it out for a buyer with a different loan,” explains Joshua Jarvis of Jarvis Team Real Estate in Duluth, GA. Jeff Knox, broker and owner of Dallas-area real estate firm Knox & Associates, says this is the most common outcome in his area. “Of all possible outcomes, this is what happens most frequently,” he says. “While the seller will usually be upset about the low appraisal value, most reasonable sellers eventually come to terms with the fact that any other appraisal values by potential future buyers will most likely come in at about the same value.”
4. Walk away
No one wants to let a property slip through their fingers, especially if it feels like their dream home. But beware of ignoring a low appraisal— you could end up losing thousands when you decide to sell. If you have an appraisal contingency in your contract, you can walk away, get your deposit back, and hope for better luck the next time around.
