The home buying process includes myriad steps. And while home buyers can prepare themselves by obtaining mortgage pre-approvals and working with Exclusive Buyer Agents, there are some areas that fall outside of buyer control.
One example is the home appraisal. An appraisal is required by the mortgage lender as a condition of final loan approval. This is because the home is collateral for the loan.
An appraisal is an unbiased, detailed, professional opinion of market value, prepared by a third party with no vested interest in the transaction.
The appraisal considers recent home sales for similar properties, the home location, and the direction of the local market. Appraisers also look at the condition and quality of the home. They evaluate its characteristics, including age, square footage, number of bedrooms and baths, amenities such as fireplaces and patios, and distinctive features such as scenic views.
In an ideal world, the appraisal matches the sale price, and the transaction continues without a hitch. In reality, about 1 in 5 home appraisals disagree with the sale price and show a lower market value. According to the Chicago Tribune, 11% of failed home sales in 2015 were caused by low appraisals.
Part of the challenge is that home appraisals are subjective. They are based on the personal judgment, experience and market knowledge of the appraiser involved. Appraisers are also cautious about the values they issue, because they are highly regulated and scrutinized.
Meanwhile, home sellers tend to be very optimistic about their home value. A seller’s real estate agent usually prepares a “Comparative Market Analysis” to provide pricing guidance. However, it is a recommendation only, and the home seller ultimately decides the price. The price of a home can be rather arbitrary, which is why formal appraisals are required by lenders.
For this reason and many others, it is essential for home buyers to be represented by an Exclusive Buyer Agent. Unlike typical sales agents, an EBA serves only the home buyer and protects their best interests. This includes providing expert market guidance when making a purchase offer, and protecting you with proper contingencies.
For example, if you are buying a home and the appraisal falls short, your appraisal contingency would enable you to re-negotiate the sales price. You would also have the option of canceling the deal and walking away.
If the appraisal appears to be inaccurate, it may also be possible to have it adjusted, based on the most recent sales comparisons or other material information.
A word of caution: the seller may prefer that you pay the difference between the appraisal value and the sales price, which translates into making a larger down payment. Depending on the gap between the appraisal and sales price, this may not be feasible for you. In any case, it is never in your best interest to overpay for a home! Yet without the representation of an Exclusive Buyer Broker, this is the kind of suggestion you may get.