By Lyssa Seward
Alexandria, VA – Hello Alexandrians! I hope that summer is going swimmingly. It feels so good to be returning to our regular summer festivities.
Most people do not purchase a house more than two or three times in their lifetime, and the process is constantly changing and evolving. Federal and state laws continually adapt to current market conditions. There are many parts and players involved in a home purchase.
This month’s Z Real Estate article focuses on the appraisal. What is it and what role does it play in the home selling/buying process?
An appraisal is the estimation of a home’s current market value. A licensed appraiser completes this estimation by comparing the recent sales of homes in the area to the property that is being appraised.
Appraisal in residential real estate can be done for a variety of reasons, including:
- Death of one or more owners for settling an estate
- Divorce settlements
- Refinancing a home
- Purchasing a new home
Are appraisals always needed for a new home purchase? This is a complicated question, but the answer for a cash purchase is no. The buyers may ask for an appraisal contingency with a cash buy, but it is not required but may be a preference.
Are appraisals always needed for a financed new home purchase? When a lender is involved, a lender-ordered appraisal is usually required, but not always. If a buyer puts down a very large down payment or comparable analysis shows irrefutable evidence that the house will appraise, the lender might waive the appraisal. The lender needs assurance that the home is equal to or higher than the agreed-upon sales price so that the borrower doesn’t find themselves underwater on their loan once financed.
(I like to say there is no “never” or “always” in real estate.)
How does an appraisal contingency work in an offer to purchase? The last five months have found very few appraisal contingencies on offers to purchase. Most of the time, this contingency was waived by purchasers to compete and win in multiple offer situations.
What happens if a home appraises below the agreed-to purchase price? The way the appraisal contingency is written, one of four things can happen when a low appraisal is received:
- The buyer can bring the difference between the sales price and the appraised value in cash (the lender will not finance the difference).
- The seller can lower the sales price to the appraised value.
- Buyer and seller can come to some amicable solution, i.e., split the difference between the appraised value and the sales price.
- If an agreement cannot be reached, either party may void the offer to purchase without penalty.
Can a purchaser waive the appraisal contingency? 100% yes, but buyers need to be aware that if the home doesn’t appraise at the agreed-upon sales price, they need to bring any deficit in cash to the closing table.
When can the appraisal process become problematic? Several problems can pop up with an appraisal.
- Buyers waived the appraisal contingency, assuming the home would appraise at full value, but can’t complete the purchase with a significantly lower appraisal.
- Buyers’ loan program changes (not in a favorable way) because they can no longer put down the amount of cash they intended as they must make up the difference between the sales price and a low appraisal. This can affect their interest rate.
- If the home is not in great condition, the lender might require repairs before closing, which can derail the transaction.
A good listing real estate agent will meet the appraiser at the property and provide supporting comparables documentation and a list of seller improvements, including the years the work was done and estimated costs to support the sales price.
Over the past several months, our local Alexandria marketplace has experienced a strong sellers’ market. But now interest rates are rising, buyers are distracted with summer activities, and we certainly see a shift to a more balanced market.
We welcome any questions about the home selling and home purchasing process.