What does it mean when the appraisal doesn’t match your offer?
Imagine this: after back-and-forth negotiations, you and the seller finally agree on a price for your dream home. It’s a sweet spot where the seller’s minimum meets your maximum. This journey of offers and counteroffers isn’t just about reaching a number; it’s a dance that determines the true market value of the home.
Now, let’s rewind to the beginning of your house-hunting adventure. You sit down with your real estate agent, excitedly listing your must-haves: the number of bedrooms and bathrooms, the ideal location, and, of course, your budget. With your wishlist in hand, your agent presents you with options that tick all the boxes. But, the key to finding that perfect home within your budget starts with understanding what you can actually afford.
Step one is securing a pre-approval letter from a mortgage lender. This letter, which is based on your income and expenses, spells out exactly how much house you can afford. It’s like having a golden ticket in the home-buying process, confirming your financing is ready to go, with just the right property needed to complete the picture.
However, especially for first-timers, the excitement of finding “the one” can lead to making an offer that’s above the asking price, in hopes of winning the home. While the sellers might be thrilled to accept your generous offer, there’s a hiccup that could arise with the appraised value of the home.
The Appraiser Does Their Homework
When an appraiser is tasked with evaluating a property, they begin with a copy of the sales contract. This marks the start of their detailed assessment, where they explore public records to find recent sales data of nearby homes. They aim to select homes that are most similar to the property in question, typically focusing on three to four comparable properties.
Determining the Value involves:
- Calculating a price-per-square-foot value based on comparisons with selected similar homes.
- Making adjustments for unique features and differences, which may include:
- Lot size
- Landscaping
- Presence of a swimming pool
- Interior upgrades, such as modern kitchens or renovated bathrooms
- Overall condition of the homes
This process acknowledges the rarity of finding two homes in the same area that are exactly alike. By adjusting for the unique features and conditions of each home, the appraiser ensures the valuation accurately reflects the property’s true worth in the current market.
What Happens When the Appraised Value is Higher?
In the world of property purchases, it’s pretty standard for the sales price listed on the contract to be on par with the appraised value. This makes sense, as the agreed price usually mirrors the going rates in the current market.
But, now and then, things don’t line up. There are times when the property’s appraised value swings higher than the price mentioned in the sales contract, and sometimes, it comes in lower.
For those looking to refinance, a higher appraisal might nudge your interest rate in a more favorable direction, thanks to something called a ‘loan level pricing adjustment.’ This is because some loan programs set their rates based on how the loan amount stacks up against the property’s value. Plus, if you’re eyeing a cash-out refinance, a higher appraisal could mean more cash in your pocket at closing.
In the scenario of buying a home, a higher appraisal doesn’t shake up the financial side of things too much. Lenders evaluating a loan application will lean on the lesser of two figures: the appraised value or the sales price. So, even if the appraisal soars above the contract price, buyers won’t be able to use that extra value to beef up their down payment.
A higher appraisal essentially hints that the buyers might have snagged a sweeter deal than they thought, paying less than what other similar homes in the neighborhood are going for. On the flip side, if the appraisal falls short of the offer, the ripple effects are more pronounced.
What Happens When the Appraised Value is Lower?
Imagine you’ve made an offer of $400,000 for a lovely home in Palm Beach County, Florida. The next step is the appraisal, which, after a short wait, comes back to the lender valued at $390,000, not quite reaching your offered amount.
So, what’s the next move? The lender will base the loan amount on the lower value between the sales price and the appraised value, which in this case is $390,000. This means the buyers would need to come up with the $10,000 shortfall to close the deal. Or, they might decide to have a chat with the sellers to see if there’s room for negotiation on the price.
Nowadays, most sales contracts have a safety net built in for buyers. There’s often an addendum that allows buyers to back out without losing their earnest money deposit if the appraisal doesn’t match the offer price. If the sellers stand firm and don’t want to budge on price, the deal might fall through, sending the buyers back on their search for the perfect home.
Navigating the Appraisal Waters
Navigating the appraisal process is a crucial step in the journey of buying or selling a home. It offers a moment of truth, where the value of a property is measured against the market’s pulse. Whether the appraisal comes in high, low, or right on target, it’s essential to understand its impact on your transaction. For buyers, it might mean negotiating prowess or a need to adjust expectations. For sellers, it’s about recognizing the fair market value of their home.
Remember, the appraisal is not just a hurdle to overcome but a tool that ensures fairness and transparency in the real estate transaction. Armed with knowledge and the right guidance, navigating these waters can lead to successful outcomes for all involved. Happy house hunting and selling!
Located in West Palm Beach, Florida, our experienced mortgage loan officers are equipped with local insights and specialized knowledge to meet the distinct needs of our community. Embark on your home-buying journey with confidence, guided by our experts through every challenge, including appraisal discrepancies. We streamline the mortgage process and clarify property valuation, ensuring a smooth path to homeownership. Connect with us for a seamless experience and step closer to your dream home today.
