Are you new to homebuying process? Maybe you’ve heard the word appraisal but are unsure what it actually involves. The appraisal occurs after the due diligence period. The due diligence period or inspection period as it is referred to here in Arizona begins the day after an offer is accepted. It usually lasts for 10 days and is time given for the buyer to investigate all aspects of the property once a contract has been fully executed. I discuss this topic more in depth in a different post.
Back to appraisals… by definition, a buyer and seller determines the fair market value of the home with an accepted offer price…which is: the amount a ready, willing, and able buyer is willing to pay and a seller is willing to accept.
However, if you are using a loan to buy a home, the mortgage lender wants to make sure that the amount they are lending is justified and will only grant the loan based on the valuation given. They assess this by having an appraisal done by an independent certified appraiser (typically paid by the buyer and costs range between $500-600). The fee is charged through the lender prior to the appraisal appointment. A cash buyer can also opt to get an appraisal done as a contingency of the purchase to ensure he or she does not overpay for the property. I had a cash buyer do that and for the $500 he spent, he was able to save himself about $15,000, as I used the results to negotiate a new sale price for him that was more in line with the appraisal valuation. Make sure you understand that an appraiser hired under a mortgage purchase works for the lender, not the buyer. Most people don’t realize this.
While appraisals aren’t always an issue, at times they can be. If the home is unique or in a rural area, the appraiser may find it difficult to evaluate because there aren’t enough sales of comparable homes in the vicinity. Once in a while, the appraiser may make an error or they may just get it wrong. In any event, if the appraisal value comes back lower than the agreed upon price, your agent will need to address it and renegotiate on your behalf.
Through your real estate agent, you might see if the seller will agree to lower the price to meet the appraised value or you can ask the seller to meet you halfway – he comes down a bit and you come up a bit – that’s if you are able and willing to bridge the gap by bringing cash to make up the difference. Some buyers are willing to do that if they see the value that the appraiser is unwilling to give credit for and want the house badly enough. In a hot sellers market, understand that sellers may not be willing to budge on price. One last option other than cancelling the deal is to dispute it with your lender, NOT the appraiser. You may try to discuss with your agent as to whether you should request a Reconsideration of Value. This is a last resort as it rarely comes back in the buyer’s favor. However, if your agent is able to uncover incorrect data in the report or provide missing information that would improve the value, you may be able to get the value you need. If the value remains unchanged after a second review, you will need to make a decision.
Again, hopefully your appraisal will come back with no issues. Most often it is uneventful. Your lender may notify you that it appraised and the deal keeps humming along. The following pertains to anyone purchasing a home in Arizona… per the terms of the Arizona purchase contract, if you and the seller simply can’t work it out, you have 5 days to decide from the date you received the appraisal report to cancel the contract and get your earnest money back. Otherwise, if you don’t respond in time, a non-response is equivalent to acceptance of the valuation and you will be bound to make up the difference.
If the appraisal comes in above the agreed price, then great! Instant equity. But don’t be surprised if the appraisal comes back at almost exactly the amount of the purchase price. The appraiser is just looking to justify the value is about right.
Would you like more information about the homebuying process in Arizona? I am happy to answer any questions you might have.
