Buying Your First Home – Three Blunt Truths About Appraisals when Getting a Mortgage

As a first time home buyer, there are things along the way to buying your first home that can quickly put a stop to getting the home. We have gone through how to negotiate for the right price for your home as well as what it takes to get it inspected. The repair amendment can be one of the most stressful steps in the process as you attempt to get the seller to make some repairs. The next step in the process is that your mortgage company will hire an appraiser to determine the value of the home. The lender needs to know that the loan being provided to you can be recovered when selling the home if the need should ever arise (such as they have to foreclose on the house). Here are three blunt truths about the appraisal you need to know when getting the house appraised.

 Appraisers Distinguish Between Value and Price – Believe or not, there is a very big difference between the price of a home and its value. Here is how one appraiser defines the difference in the Real Estate Appraisal Principles and Procedures

    Value refers to what a piece of property is theoretically worth under certain circumstances. Price on the other hand, refers to the actual amount paid by a particular buyer to a particular seller in an actual transaction.

From the point of view of the lender, they are concerned about value. Why is that since you are willing to pay the price you agreed upon with the seller? A lender is worried about the value because what it can theoretically get for the home translates into what they can recoup for their investment into the home. Another way to look at it is that the price you are paying for the home means very little to the lender because they only want to know what they might get for the home at a future date. In many markets, you will see homes that go far above asking price of a home which means the mortgage company will probably not cover the entire price paid for it. What do you in this case? Read on!

Appraisals have to match the agreed upon sales price – If the value of a home is appraised differently than the price being paid for a home, there are some considerations you will have to make. If the value is higher than the price, you are good to go. You will even have some equity in the home when you initially buy it so good for you! If the value is lower than the price, you have to figure out a way to make up the difference between what the lender will give you as a loan (value) and what you are willing to pay for it (price). Many buyers will just pay more down to cover the difference, but some buyers are not in a position to do this. In this case, you will have to negotiate with the seller to possible lower the sales price to match the appraised value. You can visualize how the seller will feel. They will be asked to give up some of their profits to sell the home to you. Most sellers will not move on this as they feel they can get the sales price from another buyer. A third option would be to meet in the middle where the sales price is dropped some and the buyer puts more money down. No matter what option is chosen, it will be a difficult pill to swallow for one side of the transaction. Does this happen often? It depends on the market. If it is a seller’s market where homes are few and far between, many buyers will find themselves offering above asking to get the house. In these cases, you will often see a home appraised lower than the sales price because it takes time for value to catch up with the quickly moving market.

Appraisals are Subjective to each Appraiser. – In the book quoted before, the authors go into some details about the steps necessary to take to appraise a home. It is a structured process. They have to define the appraisal problem including the type of property and what is being asked to be appraised. A preliminary analysis will be done to chart a course forward. The appraiser will then collect data by looking at the site and research what has sold recently in the area. They will then look at the property from the three different approaches of value (sales comparison, income approach and the cost approach). They will reconcile the different values realized and then draw up the report for the lender. Appraisals had to become this structured in the late 1980s when some really bad appraisals lead to a major financial crisis(Savings and Loans Crisis). Despite all of this structure, it ends up that appraising a property can be more of an art than a science depending heavily on the subjective viewpoint of the individual appraiser. To help battle this subjectivity, your agent should work with the listing agent to communicate to the appraiser how the sales price was determined. An appraiser is not required to take this information, but more often than not, they will do so. One trick is to leave a packet of information behind for the appraiser, who can take it to help to determine price. It should be noted that agents have to be careful not to be too aggressive in their communications with the appraiser, taking a more suggestive approach as some appraisers find the agents involvement to be undue influence in their decision making and will not tolerate it. Finally, appraisals can be appealed but very few are often changed. Ask your agent about how you can appeal a appraisal.

If you are one of the many getting a mortgage when buying your first home, you will have to face an appraisal from the bank to determine the value. Just remember that value and the sales price are two distinct things that can sometimes lead to further negotiations between you and the sellers. You can help to combat the subjectivity of appraisals by having your agent work with the listing agent to help communicate how the sales price was determined. Hopefully, in the end, all will be good and you can move forward with buying your first home.