Step 19 to Buying a Home: The Appraisal Process

The second major contingency, after the Due Diligence Period, is your appraisal contingency.

What is the appraisal? Read this blog post to find out!

Who orders the appraisal? Your mortgage lender is the person who orders the appraisal, but he or she will call you in the early stages of your loan application process to get your credit card details to pay for the appraisal. Generally, the cost is somewhere between $350 – $500 and is considered part of your closing costs, even though you pay for it up front.

A few things to know about the appraisal:

• You do not need to attend. It's likely that you won't even know when it is happening, just that it is part of the process and will occur during the timeline in the contract
• The buyer’s REALTOR® does not attend either, in most cases. The appraiser schedules his or her appointment directly with the seller's REALTOR® and obtains property access.
• The lender orders the appraisal through the 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. Expect it take about 2 weeks from the time you pay for the appraisal until your lender receives the report. For this reason, we don't recommend that you allow the lender to wait until you conclude the Due Diligence Period to order your appraisal; this is a very important deadline and comes with some very real possible financial implications if it is missed, which we will describe below.
• Once the report is written, it’s sent to your mortgage lender. Your mortgage lender will then forward it to you and let you know whether the property appraised at the purchase price, below the purchase price, or above the purchase price.

Why does the appraisal value matter?

Just as the lender must assess if you are a good risk as a borrower, the lender must also assess if the property is a good risk to loan on, at the price you've agreed upon with the seller. Therefore, the lender relies on the appraiser, who is an unbiased third party, to give his or her professional opinion of the value of the property, based on recent comparable sales. The appraised value will either be at the purchase price, below the purchase price, or above the purchase price  

• If the property appraised at the purchase price, nothing further needs to be done and the closing process will proceed forward as planned. Don't be surprised if the appraised value comes in exactly at the contract price; this doesn't mean the appraiser cut corners or just looked at the contract price and agreed. Their only job is to justify the contract price, not to determine fair market value.
• If the property appraised for more than the purchase price, congratulations! That means we got you a great deal and you’ll have instant equity in your home on the day you move in! 
• If the property appraised for less than the purchase price, we have a problem. That means the bank will only give you a loan for the appraised value. In this case, we then go back and renegotiate the purchase price with the sellers, ideally down to the appraisal price. If they won’t come down to the appraisal price, then you can choose to either walk away and get your earnest money back or bring the additional funds to closing. For instance, if the purchase price is $500K, but the appraisal only came in at $475K and the sellers won’t go any lower than $480K you have to decide if you’re going to bring an extra $5K on top of your down payment and closing costs to closing or walk away from the deal. 
  
  This is where the appraisal contingency comes into play and is such a very important deadline in the contract. If an appraisal comes in low before the end of the appraisal contingency deadline, we can attempt to renegotiate the contract price with the seller. The seller isn't required to renegotiate, but if we cannot come to an agreement, then you get to walk away from the contract and get your earnest money back, under the terms of the contingency. But if we miss that deadline -- if the appraisal comes in late -- we lose the ability to protect your earnest money. We can still attempt to renegotiate the price with the seller, but if they refuse (which they have the right to do), and you walk away, the seller has the right to claim your earnest money. All because of a missed timeline. This is why it's so important to choose a lender you trust and to move forward with ordering your appraisal early in your contract, as the appraiser's schedule may dictate a longer time to get the appraisal back, and your earnest money is much more valuable than the price of the appraisal.