The successful sale of a home is usually predicated on the buyer getting financing to pay for the property. And in those cases, the buyer is somewhat at the mercy of an appraiser to complete the deal. Why?
An appraisal estimates the market value of the home to protect the lender’s position. A financial institution will not provide a loan to buyers for more than the home’s worth or the lender 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.
This can be another anxious step in the selling process because it could lead to buyers backing out of the deal under the financing condition that parties often sign as part of the overall purchase/sale agreement. Without the financing contingency, the buyer is on the hook to pay for the home (with cash or by some other means, including help from the seller).
The lender orders the appraisal through a third party and, in Washington state, the buyer pays for the service as part of closing costs. (Neither the buyer, seller nor real estate professionals can select or directly compensate the appraiser.) The appraiser will typically need 30-60 minutes to review the condition of the home and surrounding land to determine market value. The seller should not be home when the listing agent (or sometimes both brokers) and appraiser meet at the address.
Throughout the process, the appraiser is gathering facts, including reviewing the purchase and sale agreement, on which he/she will base a 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.
The appraiser files a report to the lending institution – usually in about a week. The appraised price is then shared with the buyer and his/her broker.
If the property is appraised at the purchase price, nothing further needs to be done and the transaction will proceed forward as planned.
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 listing agent (and thereby notifying the seller). With notice in hand, the seller has 10 calendar days to respond. Typically, responses can be:
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- Seek a second appraisal (in hopes of receiving a higher valuation);
- Request a reconsideration from the original appraiser (in which agents emphasize comparable property prices, or “comps”);
- Offer to lower the price to market (appraised) value; or,
- Reach compromise with the buyer 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. 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 clause 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 request (written or verbal) – something some sellers and their agents fail to do … but not this one!
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 take back his/her earnest money. Those are a lot of “ifs” but it can happen.
This is why it is so important for sellers and listing agents to stay apprised of a buyer’s loan efforts so that seller is not caught off guard at the closing table and learn that the appraisal came in low. That would be a dereliction of duty on the part of the listing agent.
In most cases, though, the market value and market price are the same or “close enough” to make the above scenarios irrelevant.