What is a Home Appraisal, And What Happens If It Comes In Low?

When you purchase, sell or refinance a home, the term "appraisal" is bound to pop up at some point in the process. Anytime you are dealing with a lender, you can expect to have a home appraisal to find out how much the home is worth.  Both the buyer and seller are affected by the appraisal. So let's find out what exactly a home appraisal is! 

What is a home appraisal?

A home appraisal provides an estimate of how much a home is actually worth based on comparable sales in the area, market trends, and a comprehensive inspection of the property in terms of value. A licensed appraiser is typically hired through the lender, who orders the appraisal. This is done to ensure the home's value is unbiased and accurate. It is required to make sure the lender is not lending more money than what the home is worth.

Home appraisals cost around $300-$600 and are paid by the buyer, but keep in mind, they're ordered by the lender. It may take anywhere from a few days to two weeks for the final appraisal report to be completed. The lender may receive the report, but need an additional few days to review and verify the values are correct.


Is a home appraisal the same as a home inspection?

No. A home inspection is typically ordered first, prior to having a home appraisal completed. The buyer has a right to choose and pay for their own home inspector to look for any problems in the home and determine whether certain areas need repairs. This usually include the four point home inspection, including plumbing, electric, A/C and roof. A WDO (or termite) inspection is common and required by certain lenders and homeowners insurance companies. Pool inspections are also considered part of home inspections. 

A home appraisal is a much more in-depth process that considers all factors that can affect a property's value. This includes condition of the property, any upgrades or additions made, the size of the lot, age of the property, number of bedrooms, bathrooms and garage spaces, and recently sold properties of comparable size and condition (aka "comps") in the same geographical location.

What happens if the home appraises less than the offer price?

The appraisal process can be extremely nerve-wracking. In a seller's market, where sellers price their homes especially high, it's important to be realistic with current market trends to avoid a major gap between purchase prices and appraised value. You may have heard the term "appraisal gap." Buyers are now removing the appraisal contingency, fully aware that if the appraised value of the home is less than the purchase or offer price, they are willing to pay the difference out of pocket. 

If you do have an appraisal contingency in your contract and the appraised value falls short of the purchase price, there are a few options:

1. Pay the difference in price.

Even with an appraisal contingency, you can still make up the difference. Just know that you will need to pay out of        pocket. The lender can decrease the loan amount and you will need to increase your down payment to cover the difference between your new loan amount and the agreed upon price.

2. Request the seller to lower the purchase price.

If the seller is realistic and understands the home is valued at a certain price and willing to lower the purchase price, you should be extremely happy. Let's face it, people wants to see a monetary gain from their investment and having to lower the prices is not always likely, but it can absolutely happen. 

3. Renegotiate the price with the seller.

Again, this is shot in the dark, but it never hurts to try. The buyer can agree to pay a certain amount and the seller can agree to lower the purchase price to meet somewhere in the middle. For example, if the appraisal is $10,000 short, the seller may agree to lowering the purchase price by $5,000 and the buyer will make up for the other $5,000.

4. Dispute the appraisal.

Request to look over the appraisal report. Check for any discrepancies. If you notice anything on the report that doesn't justify the value in comparison with the other sold homes, let your Realtor or lender know and they may be able to correct any deficiencies.

5. Cancel the transaction.

If the buyer and seller can not come to an agreement, meaning the seller is unwilling to renegotiate the purchase price and the buyer does not want to pay the difference out of pocket, the appraisal contingency allows the buyer to cancel the transaction. The good thing about the appraisal contingency is that it allows the buyer to receive their earnest money deposit back.



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