Invariably when selling your home, an appraiser will come out to visit the home and prepare an appraisal of your property. If the buyer is financing the home (almost always the case), the mortgage company will require an appraisal. The appraiser will look at the property, compare it with other homes recently sold in the area, and will come up with their opinion as to the value of the home. This appraised value will have a very important affect on your transaction. You might have a few questions on the process such as:
- What goes into an appraisal and what does it mean to you?
- What happens if the appraisal value is lower than the agreed upon sales price?
- The buyer and you have already agreed upon a price. How can a stranger change that agreement?
- Can we get a different appraiser if we don’t agree with the appraisal?
The Appraisal Process
Appraisers are licensed by the State of Oklahoma. They must pass a test and demonstrate a level of knowledge on the local real estate market. They also are required to attend continuing education on how to perform appraisals. Appraisers are required to use a scientific process to value your home, but in the end, the appraisal is still an expert opinion.
When an appraisal is requested by the mortgage company, an appraiser in assigned from an appraisal pool. In the past mortgage companies were able to choose their appraisers, but this is no longer the case in Oklahoma. Appraisers are independently assigned and do not depend on the mortgage company for their work.
They are required to visit the property and perform a cursory inspection. This is not the same as a detailed home inspection. The appraiser may only spend 15-20 minutes looking at the overall condition of the home and measuring rooms for square footage calculations. They generally take pictures of the home to support their appraisal. After visiting the home they generally search the MLS to find comparable properties that recently sold in the same area. These comparables ideally should be built about the same time, be in the same neighborhood, and be in similar condition. Of course no two homes are identical so the appraiser must then adjust the values on your home to account for these changes. These adjustments can be for square footage, location, wear and tear, age, and other variables.
The most common way to appraise a home is to compare it to similar nearby properties that have recently sold. This is not the only way to come up with an appraised value, but the most common in urban and suburban real estate. The appraiser will use the same MLS information that I use to find comparable properties. Ideally these should have been sold within the past six months, but if needed the appraiser might go back one year. They typically do not use listed properties for appraisal purposes. Once comparable properties are found, the appraiser will drive by those to compare them to the subject property. They will then prepare a detailed report of the subject property comparing it to nearby recently sold homes, making adjustments for location, square footage, the condition of the home, amenities, etc. This report will include their best estimate as to the value of the home.
How does this affect you?
You and the buyer have already agreed on the price of the home, yet the appraisal comes in low. How does this affect you? First, it can be potential bad news. Mortgage companies won’t loan more than the appraised value of the home. This means if you want to sell their home to someone who is taking out a mortgage to purchase the home (98% of the people) then you will have to lower the price to appraised value, or find a buyer willing to pay the difference out of their own pocket. Sometimes this issue can bust a deal, as it can dramatically impact the your funds for your next home purchase. Unfortunately you are left with a difficult choice – either lower the price to appraised value, or most likely see the ready, able and willing buyer walk. And since most home buyers must finance their home purchases, you will most likely be eventually forced to lower the price to appraised value or find a buyer willing and able to pay the difference in cash. In some instances, various pieces of the contract must be renegotiated in order to make the lower appraised value work for all parties.
What options do you have if you don’t agree with the appraisal?
You can request another appraisal. This might change the value but not often. The problem with another appraisal is that if the loan is an FHA or VA loan, the submitted appraisal stands for six months. You can contest the appraisal but the process begins with filing a complaint, buying precious time and with time of the essence in a real estate transaction, it is often best to accept the expert opinion and figure out how to complete the transaction satisfactorily for all parties. The best approach for the seller is to arm the appraiser with plenty of information on the home in advance so the appraiser is aware of any special features of the home. Sometimes an appraiser will reconsider their valuation if new information about the home is brought to their attention, but it is much easier to give the appraiser all the information in advance if possible to assure a proper valuation.
FHA Appraisal requirements
The appraiser will also look to make sure certain features of the home meet FHA guidelines. For example, if a home has an elevated porch without handrails, the appraiser will require the seller to either install handrails or remove the steps without handrails. This is something the home inspector would not necessarily cover in their inspection but is a requirement for an FHA loan. Any safety issues such as exposed carpet tacks or broken windows might also be called by the appraiser as a repair requirement as well as any factors that might compromise the integrity of the structure such as peeling paint or roof repairs.
How does this affect negotiations?
A low appraisal is not necessarily a good thing for the buyer. Sometimes the seller will not agree to the lower appraisal and the buyer won’t be able to cover the difference, and the deal will fall through. Sometimes you must face the fact that they have a ready, willing and able buyer and that the price is just too high and will have to be lowered to appraised value. Often this will require a renegotiation of the deal since now the seller may not have as much room to place with on their side. The best thing for all parties is to agree on a price for the home that is realistic and can be easily meet the appraised value. Because I sell so many homes in the metro Oklahoma City area, I normally have a pretty good understanding of the value and run the same comps as the appraiser. I will advise you on my thoughts on pricing prior to making an offer. Typically the price agreed to is pretty close to the appraised value and we seldom have appraisal problems. If one arises we can help with the negotiations and provide advice to make it a win-win for everyone. Worst case, if the house does not appraise for the agreed-upon value you can cancel the contract. The buyer will get their earnest money back, while you have lost precious time in selling your home.