A critical component of any real estate transaction is the appraisal report. The appraisal functions as the eyes of the lender, letting the lender know if the home is worth the sale price as well as giving the investor insights into the basic condition of the property. The appraisal report serves to assist the borrower in disclosing important information such whether values in the area are declining, appreciating, or remaining level, discusses neighborhood characteristics, as well as placing a value on the property. I can assure you, no one wants to pay more than a property is worth.
It is important to note that an appraisal is a snapshot of what property value at a given time. It is also a somewhat subjective document-all the appraiser can do is look at properties that are hopefully within close proximity with similar features to the subject property, using standard deduction and additions, bring the values of the comparable properties as close as possible to the subject property in assessing the amenities. In other words, an appraisal is not a scientific endeavor. There is no agreed upon formula that if you plug A (say the value of a three car garage) subtract B (an in ground swimming pool) that you will equal C-the value of the property being evaluated. There is room for differences in opinion. The tools the appraiser has to use are properties that have sold and have a real price. Not properties that are on the market-though they may be cited in the report, but are not used to determine value, nor properties that sold a year or two years ago.
When an appraiser is given the task of establishing value on a property they must search sales in a particular neighborhood to ensure that the sale price is indeed within the range of established values. It is not the appraiser's job to create equity for the buyers within the context of the appraisal. I have had buyers tell me they are disappointed with their appraisal reports because the home's value was established at the sale price. The two comments that come to mind with regard to that are that it is the appraiser's job to determine that the home is worth the sale price, nothing more-so he or she isn't necessarily looking to find extra value. The second point is that competent real estate agents are going to market properties at approximately the value they are worth-not try to run up the score so to speak. A good realtor has a pretty good grasp of what a listing is worth. So the best one can hope for is no negative surprises on value. If you are awarded a bit higher price in value-that is a bonus.
I would also caution people that the property tax assessment records are not an accurate estimation of true value. In Indiana values for property are determined by a process called "trending" which involves assessing all the recent sales for a given area, feeding them through a computer program and chunking out the results. While there are areas in which most of the homes are within a particular price range and very similar, there are also areas where the homes are wildly disparate-so property tax assessments are not normally the best method of determining value of a specific home.
A good buyer's representative should be able to obtain sales information supporting the listing price of a property.(Or if the listing price is too high.) In any case it is a good idea to request this from your agent prior to placing an offer on a property. The agent has access to much of the same information that the appraiser is going to use, so this is an excellent service that can be used on your behalf with making an offer.
95% of the time homes appraise at or about the purchase price. If listing agents have done their work, they will want a property they are listing to reflect the value of the neighborhood. Since the listing agent is the one who pays for marketing the property, it is a losing proposition to list overpriced homes-though it happens if a seller is particularly resistant to the price range that is suggested. Sellers are emotionally involved in their properties and that emotion can color what they perceive as the value. During my tenure as a real estate agent when I encountered a seller that was absolutely firm on the price they wanted to list at, regardless of what my analysis showed, I would write the first price reduction into the contract for a particular time so I could take it automatically and not be coupled to an over pricing listing that I knew I couldn't sell. If the seller refused to do that I often walked away. And to be perfectly fair, I wasn't always right either. But those occasions occur less frequently these days since the crash in home values in 2008.
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So what happens if the appraisal comes in lower than the sale price? Can you still buy the house? That depends...
The bank will only loan you x percentage of the appraised or sale value of the home, whichever is lower. So if you are putting 5% down and your home appraised for $100,000 instead of $105,000, your loan will be for $95,000 not $99,750. So you can still purchase the home for $105,000 if you can come up with the difference between the $95,000 and the $99,750. Most buyers can't or don't want to do that. If you still want the home, often another negotiation will have to occur based upon this new information that was not available when you made your offer. If both you and your seller really believe that the home is worth the $105,000 you can ask for the lender to review the appraisal-but to do so you will have to provide proof that the appraiser missed something or didn't consider some available comparable sales. It helps if you can provide those additional sales to the appraiser-sometimes they will revise the report sometimes not. The lender can't be involved in any of this as we are not allowed to contact or speak with the appraiser. We can provide the appraisal dispute forms and we will send the information to the Appraisal Management Company who will in turn dispense the information to the appraiser but the Federal Government has drawn a huge red line between appraisers and lenders. No interference is allowed. This is one (of many) areas where having a real estate agent involved in your transaction becomes key. Real Estate agents will have access to recent sales as well as data regarding the specifics of the home such as square footage and amenities in case the appraiser made an error.
Other possibilities that can occur with a lower appraisal is that the seller may agree to sell the home at the lower price or sometimes buyer and seller meet in the middle. The price is reduced some and the buyer pays extra.
Appraisal reports are also used to assess the general condition of a property and it is within the appraiser's scope of responsibility to cite repairs that need to be made to bring the property up to average condition. Structural concerns may be cited. If a property is built on a slab and there is no floor covering on any portion of the slab the appraiser will not that fact for instance. The loan will not close until that situation is corrected. All types of loans are subject to that type of appraiser remark. Remember, the appraiser is the eyes of the lender and the reason for the report is to give the lender information they need in order to make a sound judgment on whether or not to loan money on a specific property.
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