- A loan is an investment in a buyer secured by real property (collateral).
- An appraisal is done to protect the lender/investor.
- If the house appraises for less than the selling price, the loan may be too risky.
After a seller and buyer reach a “meeting of the minds,” meaning that they have agreed to a price, terms and conditions so that a sale can move forward, most purchase agreements provide each principal a number of opportunities to re-visit the agreement.
When a problem arises, they can negotiate the issue, renegotiate the purchase offer (specifically, the purchase price), or they reach an impasse that could end the process.
Generally speaking, there are two major events or “contingencies” that stand between two relatively happy parties agreeing to transfer a deed. The two are the property inspection and the mortgage approval.
The property inspection usually occurs within the first week or so, and the appraisal usually occurs within weeks of the proposed settlement date, which makes an appraisal problem tougher on the parties as they are more invested in the process concluding successfully.
The mortgage approval involves a number of activities centered on vetting the buyer and appraising the property. The need for an appraisal is premised upon the concept that a loan is an investment in a buyer.
The lender earns fees for being in a position to make the loan and attempts to protect its investment by making sure that the property is “worth” the risk associated with making a loan to a person who may at some point (for a variety of reasons) become unable or unwilling to continue making the monthly payments to repay the loan.
In addition to whatever has happened to the actual market value of the property compared to the amount loaned, the process of taking the property back is a costly one.
Appraisers evaluate property based on a number of criteria, and the “value” they attach to a specific parcel is based on comparable activity. It is a snapshot that is a moving target.
Markets rise and markets fall so the durability of a given appraisal is not guaranteed. Results from years ago or for purposes other than a sale may be worthless when considered in the present day.
When attaching a marketing price to a listed property and when determining how much to offer a seller, the future appraisal should be given some consideration as no one wants a sale to fail, especially given the timing of the appraisal.
The appraised value is interesting as it purports to suggest a specific whole dollar amount to the “value” of a parcel. I am not an appraiser and respectfully suggest that two or more appraisers will arrive at different valuations.
Further, I would respectfully prefer to see that a sale price was either acceptable (meaning at or below the appraised value) or not rather than seeing a specific number when the value exceeds the offered price.
I have had sellers ask if they could raise the price!
Obviously if a house does not appraise, the parties do need to know the amount to see if they can work it out. As objective as it is meant to be, the result is subjective in that the parties want to still do business but may lack the resources to complete the process.
It all starts with reasonable pricing, knowing the comparables and advising the clients that the appraiser typically has what appears to the final say!
Agents should take time to explain pricing and the appraisal process early in the sale, so that no surprises occur later.
Andrew Wetzel is an associate broker with Long and Foster Real Estate in Havertown, Pennsylvania. Follow Andrew on Facebook or Twitter.