Appraisals have always been an important part of the homebuying process but have often been considered more of a behind-the-scenes formality. Today, however, appraisals are a front-and-center issue.
A lender orders an appraisal during the mortgage approval to confirm that a home is worth the price on the contract. The appraiser creates a report that compares the subject property to other recently sold properties – or “comps.”
That’s easy enough when there’s an abundance of sales data, but the low number of homes for sale in many areas has resulted in a lack of recent comps. Fierce buyer competition has also driven prices higher meaning yesterday’s sales often closed at prices significantly lower than today’s.
So, whether you’re buying or selling, here are a few things you need to know about appraisals.
Armed with Data: A good listing agent will be prepared heading into the appraisal process. We’ll know what comps an appraiser is most likely to use and be ready to furnish any off-market sales or very recent sales that can help make the case for a certain price.
Appraisal Gap Clause: If you’re selling in a low-supply/high-demand area, it’s a good idea to include this contract clause, which stipulates that a buyer will move forward with the purchase even if the home doesn’t appraise at full value.
Contract Terms: It’s important for a seller to look at contract terms beyond offer price, such as down payment amount. A higher down payment will generally cure most issues arising from a low appraisal.
Play Your Hand: Low appraisals used to be an automatic invitation to renegotiate. In a highly competitive market, that strategy could backfire, so the onus may be on the buyer to find a workable solution.
Broker Cooperation: A buyer’s agent is welcome to share comps and information with the listing agent if they think it will help result in a successful appraisal.
LTV & PMI: Just because a home doesn’t appraise at the contract price doesn’t mean the bank won’t issue a loan or that the buyer must bring additional funds to the closing table. However, a low appraisal will increase the loan-to-value ratio of the mortgage. So a buyer putting down less than 20% may have to pay a higher private mortgage insurance (PMI) premium.
Appraisals are just one of the complexities common in today’s market. We’re here to offer expert guidance to make your homebuying or selling experience successful and stress-free. Reach out for more information or to discuss your real estate needs.