When you are selling a home and if the buyer is obtaining a mortgage loan, their lender will require an appraisal. (If the buyer of your home is paying all cash, they also have the option to get an appraisal, however it is less common; click here to read more about appraisals for cash transactions.)
The home appraisal is different from the home inspection, and you may be wondering, “WHO orders and completes the appraisal, WHAT is the appraisal, WHEN does it occur, and WHY do I need one?”
If you are asking yourself these questions, you aren’t alone. They’re very common, and as we have said throughout our site, we love it when our clients ask questions and get to know the process better. Most people know that an appraisal will be required, but that’s about the extent of their knowledge — and that’s okay. The appraisal, underwriting and title search process are a bit fuzzy to most people. We’ll do our best here to answer most of your questions.
Who orders and conducts the appraisal?
The buyer's mortgage lender orders the appraisal through their Appraisal Management System (AMS), and it is a “blind” ordering process; in other words, by law, the lender does not know which appraiser was assigned to the property and cannot have any contact with the appraiser. This keeps the process fair for all parties — the lender cannot have any influence on the appraisal value, hence affecting the ability for the property to appraise in order for you to get the mortgage.
If you have general questions about the appraisal process, we recommend that you click here for a great article from the realtor.com on appraisals.
Let's talk here about the appraisal process on your home and our views on how that process can best be handled.
If your buyer is obtaining a conventional mortgage, the appraisal contingency period will likely last between 14 to 21 days (this is negotiated in the contract and will be on your Important Contract Dates form that we send you when you go under contract). The buyer's lender will order the appraisal, and the appraiser will contact us directly to schedule the appraisal appointment. We will make sure to notify you of the day and time of the appraisal, and as a reminder, we recommend that you treat the appraisal appointment like a showing and have the home "showing ready."
We will meet the appraiser for the appointment and provide him or her with our Appraisal Packet, which will include the following:
- a full copy of the contract
- any comparable sales we used when we priced the home (or updated comparable sales to support our contract price)
- a copy of your pre-listing appraisal (if you had one done)
- a full list of features and upgrades in your home, as well as detailed information that the appraiser may not be able to see in the visual inspection (for example, age of roof, age of water heater and HVAC system, dates of upgrades or remodeling work, list of recent repairs)
- a copy of your floorplan
In the rare event that we cannot meet the appraiser (or that he or she requests that we not meet for the appointment, such as right now with concerns of COVID-19), we will email the Appraisal Packet to the appraiser and make sure they know we are available to answer any questions they have about the property.
What does the Appraisal Contingency mean to a seller?
In Georgia, our real estate contract has a financing contingency exhibit that we use for all buyers who are obtaining a mortgage to purchase a home. That financing contingency exhibit — regardless of whether the buyer is seeking a conventional loan or FHA, VA, or USDA financing — has an appraisal contingency built into it (there is even an appraisal contingency option for buyers paying all cash that is built into our All Cash Exhibit -- click here to read about appraisals when dealing with all-cash buyers). In short, that appraisal contingency stipulates that, if the property does not appraise at or above the agreed-upon contract purchase price, the buyer then asks the seller to reduce the price to the appraisal value. If the seller cannot or will not reduce the price, and no other agreement can be reached by all parties agree that the buyer may terminate the contract with no penalty. The appraisal contingency protects the buyer in the event of a low appraisal, so the buyer is protected from potentially overpaying for the home.
When can the appraisal cause an issue in a transaction?
An appraisal can come in at the purchase price, below the purchase price, or above the purchase price. When the appraiser finishes the appraisal report, it is sent to the lender, who then sends a copy to the buyer. We will likely hear from the buyer's REALTOR® that "the appraisal was fine" or "the appraisal came in at or above value." This means, it's all good and we're in the clear -- no issues. If the property appraises at the agreed-upon contract purchase price, nothing further needs to be done and the closing process will proceed forward as planned. If the appraisal comes in over the contract value, we likely won't know that, since the buyer owns the appraisal and our only concern is whether we can move forward toward closing.
If the property appraises for less than the purchase price, however, then we have a problem. The bank will only give the buyer a loan for the appraised value, and an appraisal value below the contract purchase price means we need to renegotiate. In the event of a low appraisal, we will have an opportunity to review the appraisal at this time, and if we see any errors or if we feel the appraiser has missed an important comparable sale, we will have a chance to refute the appraisal and ask for a reconsideration on the part of the appraiser (the appraiser does not need to agree to revisit the report unless there is an actual error).
If the appraiser does not revisit the report/value (or if he does and it still comes in low), then the buyer will likely come back to us and ask to lower the purchase price down to the appraisal price. If we agree to the appraisal value, we all sign off on the new price and move forward toward closing. If we say no, then the buyer has to either come up with cash at closing for the difference between the appraisal price and the purchase price (many buyers can’t or won’t want to do that) or they have the right to terminate the contract, get their earnest money back, and walk away. The buyer and seller do, however, have the right to renegotiate any and all terms to try to come to an agreement, and if the buyer is open to each party giving a little, it may work out. It's not always an all-or-nothing approach; every transaction is different.
Here's an example: if the purchase price is $500,000, but the appraisal only comes in at $475,000, then the buyer will ask the seller to reduce the price to $475,000. If the seller will only agree to lower the price to $480,000, then the buyer has to decide if he or she is going to bring an extra $5,000 to closing in addition to their downpayment and closing costs or walk away from the deal. If the buyer walks away, his or her earnest money is refunded, as they are protected by the appraisal contingency, and the seller goes back on the market to wait for another buyer to come along.
Still have questions? Reach out to us anytime at 404-994-2181 or Maura(at)BuySellLiveAtlanta(dot)com
