The Appraisal Could Squash Your Transaction
An appraisal is a written evaluation to determine fair market value. It is completed by a licensed professional who uses various methods to compare the property to other similar ones. It is an important part of the process because the results can affect the borrower’s ability to receive a loan.
You’re a Seller and it’s time to review offers. Or you're a Buyer and ready to make on offer...
…the offer price is the most important thing…WRONG! Not always.
Contingencies, including an appraisal clause or lack thereof, can make or break a deal.
As a Buyer in this competitive market, you try to make your offer clean by minimizing contingencies as much as you are comfortable with. This coupled with price allows you to make your best offer.
Sellers need to review offer terms thoroughly. It’s hard not to get distracted and see dollar signs $$$ with a high offer price. But there is much more to an offer than that. With each contingency there is a level of risk. Your Realtor should discuss this with you so YOU can determine what risks you are and are not okay with.
Consider this scenario:
The List Price is $325,000. The Seller receives two offers:
1. Offer is $400,000. Property must appraise at or above purchase price.
2. Offer is $380,000. Buyer will cover up to a $25k appraisal difference.
All other terms are identical.
Which offer is best?
Trick question. The better offer is in the eye of the beholder. It depends on the property and the seller’s personal situation. Do they feel safer accepting $20,000 less knowing the house only has to appraise at $355,000? Would they rather go big or go home and try to get $400,000, believing it will appraise? Do they have a home they are purchasing and need this sale to go as smooth as possible, so offer #2 is more appealing? Or are they still searching for a home and don’t mind taking the risk of starting over if appraisal doesn’t come in high enough and a new agreement can’t be made?
There’s a lot to consider and it is the Seller’s decision to pick the best offer for them.
The key here is for both parties to understand what the Buyer agrees to do if there is an appraisal shortage and what a Seller will accept, PRIOR TO SIGNING A CONTRACT.
In NH and MA, there is not an allotted spot in a standard Purchase & Sale Agreement for the appraisal. It is an added clause. As a Seller’s Agent, I don’t always see an appraisal clause included. My first request on behalf of my Seller to the Buyer’s Agent is – please include in your Client’s offer what they plan to do regarding appraisal.
It is not fun to wait ~ 2 weeks for an appraisal to come back to have it come in low and the Buyer immediately expecting the Seller to reduce the purchase price. Have a clear understanding between both parties so there is a mutually agreed upon action plan.
What the appraisal means to a Buyer? Unless you are paying cash, your lender will likely require an appraisal. So no, you can't waive it per say. However, what some Buyers do is agree to cover all or a portion of a potential appraisal difference. Depending on your loan type and the amount you are putting down this could mean having to come up with the shortage out-of-pocket or it could mean your loan-to-value ratio changes. It is important to discuss your individual financial scenario with your Lender. Again, so you know what to expect prior to making an offer.
Learn more about the Buyer side.
There can be a lot of risk, stress and anxiety when selling or buying a house. My goal is to provide expert guidance through this process. Things will naturally come up that can’t be predicted but there are steps we can take to avoid unnecessary surprises and pitfalls.
Got questions? Ask me!
Kayla
