The Appraisal…

The Appraisal…

The word appraisal is by definition from the online dictionary, Merriam Webster as:  an act or instance of appraising; especially: a valuation of property by the estimate of an authorized person.  Why is the appraisal so important when purchasing a home?  Let me explain, hopefully.

The appraisal is an instrument that reflects a value that the appraiser puts on a home, piece of land, jewelry, a piece of art, whatever item you believe has a value and would like to verify its value.  The appraiser has to go to school in order to become learned and the schools are located across the country.  The average number of hours in school is 90, followed by a test/license from most states in order to become “licensed.”    In Colorado a license is required.  To see if your appraiser is licensed in Colorado, please see, http://www.dora.state.co.us/real-estate/appraiserlicensing.htm.

Now, you ask, what does this have to do with real estate?  Well, if you are the buyer and you have found a piece of property you would like to purchase, the appraisers job is to determine whether the property is worth the amount of money you have contracted for…in other words, if it doesn’t appraise, the lender will generally not lend you additional money on the property you have fallen in love with as it’s not worth it.  They will only lend up to the amount of the appraisal. 

So what do you do if the home you have your heart set on doesn’t appraise?  Well, there are a couple of answers.  Let’s look at a scenario, say you as a buyer find a home that was listed for $400k and you feel after looking at comparable homes this one you want and it’s worth the $400k to you.  You put in an offer for say $385k and the seller agrees.  Now you talk with your lender…lender takes a look at your credit, finds that it’s okay and orders an appraisal, which is generally paid for by you, the buyer.   The appraisal cost is usually around $400-$500.  The appraiser goes out and takes a physical look at the property, takes measurements, pictures, looks at the roof, the street scene, and if the homeowner is home, will talk with them on the condition of the home.  Then they will go back to the office and try to find other homes very similar to the one you are looking to purchase and will add and subtract money (value) for additional bathrooms, extra bedrooms, finished basement, etc. to come up with a value for your new home.     So after all of his/her calculations, they arrive at a figure of $350k for the home of your dreams…but wait, you are under contract for $385k…so what happens then? 

Well, there are a couple of options…ask the seller to reduce the price to $350k and if he agrees, you go on with the contract or if the seller can’t take the $350k as it is less than he owes on the property they would be considered, upside down on the property and he would be bringing money to the closing table.   Usually the seller doesn’t want to bring money to the table, but usually doesn’t mean he won’t… so here the buyer has a choice…to go on with the contract or not.  If the buyer decides to go on with the contract just as it is they will need to bring the additional $35k in cash in order to make up the difference between the sale price and the appraisal,  with the hope of making up the money by the property appreciating over a few years.   Or if not, and they can’t agree, the contract is terminated and each party parts their ways amiably. 

Next question is, what does the seller do then with his property that’s on the market for $400k and it appraises for only $350k?  If they are not in NEED to selling, they might consider taking it off the market and sitting on it until it appreciates higher than what is owed on it and then try sell it again.  But if they need to sell, gotta do it, they will need to find a way to bring the additional money to the table to close the deal, usually with a personal loan. 

Every real estate deal is unique…no two are exactly the same as the players have different needs/wants/funds/etc. so  as real estate agents we need to be flexible and allow time for deals to pan/play out.   That’s why MOST realtors are patient people.