One of the questions we often hear from buyers is “Why does it take so long to complete the purchase of a home?” Well, you, as reader of this blog already know of the multiple layers of work taking place behind the scenes, so you understand some things take time to protect the buyer and seller.
But who’s protecting the lender, you know, the institution backing your multi-thousand-dollar loan? Ah, I’m glad you asked.
While your lender is making a final assessment of your financial standing, he/she commissions a third-party company to hire a state-licensed/certified appraiser to estimate the value of that new home you’re ready to buy. (Neither the buyer, seller nor real estate professionals can select or compensate the appraiser.) Why would a bank care about the amount of a loan you’re taking out if your credit is in solid shape?
I’m glad you asked that one, too!
An appraisal estimates the market value of the home to protect the lender. The most widely accepted definition of “market value” is, in essence, the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale. Notice “most probable price,” as opposed to “highest price.”
A lender could not provide a loan for more than the home’s worth or it runs the risk of never regaining the market value of the property should foreclosure become necessary. “Market value” is not to be confused with “market price,” which is the price actually paid on the home.
By the way, the appraisal is NOT a home inspection and does not replace one. An appraisal does not examine or evaluate the condition of the home to protect the homebuyer. It confirms to the lender what the home is worth in today’s market.
You’ve heard this from me (and probably others) that time is of the essence. It’s certainly true when getting a home appraised. It can take a few days (or longer in busier periods of the buying season) and your lender will not sign off on the loan without receiving a final market value from an unbiased appraiser.
Allow me to go down a rabbit hole for one paragraph: Some users of appraisal services do not fully understand what an appraiser can be asked to do after completion of the work. The Dodd-Frank Act of 2010 included some important provisions to protect appraisers. And that same law included specific exceptions that do not constitute a violation of their independence, including asking an appraiser to consider additional property information, such as listing more comparable properties; seeking a deeper explanation of the appraiser’s conclusion, such as which “approach(es) to value” they conducted; and, requesting a correction to errors in the report.
Throughout the process, the appraiser is gathering facts on which he/she will base the conclusion. The final figure in the multi-page report is not simply the average of results yielded by his/her findings. It’s the figure that best represents the appraiser’s expert opinion of the property’s value after all the data has been assembled and analyzed.
An appraiser’s fee is determined in advance, based on the complexity of the property assessed and the expected time it is likely to take. We see fees range from several hundred dollars to a couple thousand – typically about $200 higher when the appraisal must be returned in less than a week – and the total amount is included in your closing costs. (Fees are rising, too, because of a shortage of qualified appraisers.)
Should the market value come in lower than the offer price, buyers have the option to trigger a clause in their Financing contingency (unless that contingency was waived). The clause usually states the buyer, within three business days after receipt of the appraiser’s report, may – but is not obligated to – give notice to the seller’s agent (and thereby notifying the seller). With notice in hand, the seller has 10 calendar days to respond. Typically, responses can be:
- seek a second appraisal;
- request a reconsideration from the original appraiser;
- ask the seller to lower the price to market (appraised) value; or,
- buyer and seller reach compromise on how to meet the difference between offer price and market value.
Worst case: Seller refuses to budge on price, buyer cannot make up the difference with more cash at closing and the deal falls through because the loan would not be approved. (Remember: The lender cannot make up the difference with a larger loan; only the buyer and/or seller can address this matter.)
Another possible, but unlikely, scenario is that the buyer can walk away from the deal if the seller (through his/her agent) takes no action to force the buyer’s Financing contingency. Within the contingency is a paragraph that allows sellers to request a status report on the loan application and/or appraisal result.
The buyer does not have to share the financing details unless the seller issues a formal, written request – something some sellers and their agents fail to do. In this case, the Financing contingency clause protects the buyer, unless the seller’s agent has been assertive.
Without the extra cash (or a big win at the racetrack) AND without the seller’s agent checking up on the appraised valued, buyers could terminate the deal and receive back all of his/her earnest money. Those are a lot of “ifs” but it can happen.
In most cases, the market value and market price are the same or “close enough” to make the above scenarios irrelevant.
There is typically no set expiration date on the appraisal, but lenders likely inform buyers between 3-6 months that the valuation is either no longer valid or will need to be reviewed. In red-hot, fast-moving markets in which values are changing rapidly, lenders may ask for a new appraisal after as little as 30 days. If that is the case, buyers should request an appraisal extension or recertification of value at no extra cost to the buyer.
Mortgage applicants should ask lenders about guidelines established by the financial institution and underwriter to understand their appraisal process, timelines and costs.
Note: The final two paragraphs to this story were added on Jan. 19, 2023.