The APPRAISAL: Friend or Foe?
scottsent August 6th, 2008
The Appraisal
Friend or
Foe?
Ok…so you’re probably intrigued by the title. First, let me explain what an appraisal is for those who may not know.
An appraisal is an independent evaluation of a home’s value as it relates to amenities and as it compares to homes in the general vicinity, usually a 1 mile radius. Lenders rely on this report on which to base their loan funding decisions.
Since real estate loans (mortgages) are collateral loans (they take the home back if you don’t pay), the lender needs to make sure they can resell the home at a later date if you cannot pay, and recoup their investment.
When a seller puts a home on the market, they price it according to their broker’s comparables report, not an appraisal in most cases. Foreclosed (bank owned/REO) homes often use a ‘broker price opinion’. Even if they use an appraisal, by the time they actually sell the home, the price may have fallen.
In a market of declining values, the appraisal can often limit what the seller can get for the home.
That’s because the seller knows it’s unlikely they will find an all cash buyer, and any other buyer will likely have a loan. Since the loans are based on the appraisal, the seller has to comply with reducing the price to the appraised amount if they want to sell the home!
FOE: Many banks are forced to reduce an already agreed upon purchase price to the lower appraisal amount.
FRIEND: What this means is that the appraisal can actually HELP home buyers get a discount on the home.
The flip side of this coin is that there is a lot of investor activity in a foreclosure market. Often, the only way for you to get an offer accepted is to outbid other buyers. This usually requires you to make an above asking price offer.
However, since you read this article, you already know that you MAY be able to reduce the negotiated purchase price IF the appraisal comes in lower.
The reason is simple - the bank knows values are dropping. They look at it as cutting their losses by taking a break on the price now, rather than later. Also, in some cases the appraisal may actually stay with the property for several months, whereby the seller is required to disclose the appraised value to a new potential buyer.
So, remember - to get your foot in the door on a home between $0-200K, you often need to come in high, possibly netting the seller asking price or up to $10,000 more than asking price, but you MAY be able to reduce that amount after the home gets appraised, IF the value of the home is less than you offered (in a declining market).
- Home Purchase Negotiations
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