I was asked today by a Los Angeles home buyer “what do you mean when you say the home has to appraise.”
When a buyer makes an offer on a property they are relying on their Realtor® to have done a competitive market analysis (CMA) based on previous sales in the area. However, the CMA is nowhere near as detailed as a professional appraisal.
If you are buying a Los Angeles home with a loan then your lender is going to send out their appraiser to make sure that the home is indeed worth what you are paying for it. The appraiser may be on staff or independent, but they will be fully licensed. You, the buyer, will be paying for this appraisal.
Simply put, the appraiser, through various formulae, will determine the value of the home. If the home appraises for the price being paid then the processing of the loan should continue smoothly. If it does not appraise for the full value then you as a buyer have three options: you can ask the seller to lower the price, you can make up the difference between the appraised value and the amount you have contracted to pay, or you can cancel the contract.
In California, one of the contingencies you will be requesting is an appraisal contingency, which you will have together with a loan contingency. This allows you to cancel if the home does not appraise (or if you do not get the loan).
If you are an all cash buyer, you generally will not select the appraisal contingency. However, if you have any doubt that you are paying the right price for the home, it would be wise to make sure that contingency is in place. In this case, you will hire your own appraiser. You also have three choices: ask the seller to lower the price, cancel the contract or live with the fact that you may be overpaying.
Since the appraiser being used may be either inexperienced or from out of the area, you may also request a second appraisal, especially if you disagree with the findings.
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Jane - Great explanation! I always provide my buyers with a CMA and give them a range, but you never know what comparables the appraiser will use.
Michelle, you are right. An appraiser uses different criteria.
Jane - A great explanation of "What is an Appraisal" and what can happen if the property does not appraise for the purchase price. I always do a CMA so I know what comps an appraiser should, or may be looking at. It seems to give buyers and sellers a good value range and has minimized appraisal issues for my clients.
Laura, however, sometimes an appraisal can be off the wall, and even if it appraisers an underwriter who does not understand the area can nix the whole thing. Happened to me, and I my buyer had to find another lender who got it through.
Jane,
We cannot forget that words that are used everyday in our industry might be be familiar to a buyer or seller. You did a great job explaing what an appraisal is. :)
Patty, I know. We assume that people know what we are talking about.
Hi Jane,
Great post with a good solid explanation to a question that is asked often! We do take for granted the consumer knows our terminology!
Dorie, indeed.
Awesome idea for a post Jane. You know it's not in our contract unless we add that addendum and I'm so often surprised at the buyers agents who do not include it when offering on my listings.
Tammy, ouch. You need to check it on ours, but it is there, together with the loan contingency. I can't imagine not checking it if there is a loan in place.
We have that contingency in our contracts about the property and the buyer being approved for the loan. If had a few properties that didn't appraise, but it wasn't off by much. GREAT explanation Jane.
Carla, thank you. I had one that appraised properly but he underwrite knocked it down $100K. Go figure.
Your explanation is superb! With interest rates so low, many people are getting loans. Knowing the area market and comparables is a key integral part of getting an accepted offer on a property that will appraise.
Leolinda, we are the first defense to ensure that the buyer is going to get that loan, or if all cash, is not overpaying.
In my area, most of the time when a house does not appraise, the seller will lower the price of the purchase....but they may challenge the appraisal first. That does happen and I do advise my buyers not to assume that any funny business has gone on if the appraisal changes after a challenge.
This is a great post! Appraisels are so important and having an appraiser that knows the area is vital1
Kathryn, the only funny business is the appraiser who got it wrong :)
Barbara, that is essential.