When you’re buying or selling a home, you are likely going to face a home appraisal contingency. It can be anxiety-inducing on either end of the situation. Knowing what to expect can prepare you and reduce a bit of that anxiety.
What Is an Appraisal?
During an appraisal, someone who is licensed to conduct appraisals will do an inspection of a home to determine its actual worth. This is not always the same as the listing price. An appraiser will create a report of their findings, and then they’ll generate the appraised value of the home.
If you’re a buyer and you’re making a purchase with a loan, your lender will likely order the appraisal.
The lender doesn’t want to give more money than what a property is worth. Lenders often require buyers to include appraisal contingencies if they make an offer.
The appraisal usually happens after you sign a purchase agreement and before your lender approves your loan.
The appraiser is someone who is a neutral third-party and who is unbiased. They don’t represent a buyer or a seller.
Who Pays for An Appraisal?
Appraisals can cost hundreds of dollars. If it’s for a loan, a buyer or seller can’t order one directly from the company they choose. Rather, the lender goes through a third-party appraisal management company. The buyer pays for the appraisal. The lender sets the fee, not the appraiser.
Why Do Appraisals Come in Under Contract?
There are a few main reasons a home might fail to appraise. The first is simply that the contract price is higher than market value. This situation is especially common in hot markets, where buyers might be competing for the same house.
There may be an issue identified during an appraisal that could affect its value. For example, maybe a room was added to a home without the proper permits.
There can also be problems on the part of the appraiser. The appraiser might not know the area well, for example.
What Do Appraisers Look for?
Most appraisers use a universal form called the Uniform Residential Appraisal Report. It includes questions about housing trends in the area, demographics, property condition, utilities and how the house is a fit within the neighborhood.
An appraiser is unlikely to put a lot of stock in upgrades. Their entire objective is to create a comparison of the home to similar properties nearby.
As a seller, the most important thing you can do to prepare for an appraisal is to keep your home in great shape. You want it to look clean, clutter-free and well-maintained. Anything otherwise is going to give off the impression you haven’t taken care of the home, and that’s going to lower the appraisal which can derail your deal.
What Happens After You Get a Valuation?
The report from an appraiser will include a valuation. The report will outline the methodology used by the appraiser and will include the photos they take. You and your lender receive a copy.
Then, one of three things could happen.
If the appraiser's valuation matches the price agreed upon by you and the seller, then your lender can proceed with underwriting your loan. A match with the appraisal and the price is the last step of getting a loan.
If the appraiser gives you a valuation higher than what you’re paying for the house, then you have instant equity. This isn’t common, however.
Then, there’s the third thing that can happen. The appraisal is less than what you’ve agreed to pay. Your lender won’t give you a loan for more than the appraised value. At that point, there are a few different ways you can proceed. Your agent should be able to help you figure out the best path.
The best option tends to be convincing the seller to lower the sales price or perhaps to split the difference with you.
You can also appeal the appraisal or ask for a second one. You can also pay cash for the difference yourself, but that might be from a buyer’s standpoint one of the worst options.
If you want to take none of those options or they don’t work out, then an appraisal contingency gives you the chance to walk away from the deal and still get back your earnest money deposit.