Don’t Hate The Appraiser, Hate The Game

Get your own appraisal done early when selling your house to find out what it’s worth.

Whew!  It’s a heat wave out there right now.  The dog days of summer are upon us and that sun is not letting up.  August in Michigan is also prime weather to hit the pool or the lake—maybe fire up the BBQ and invite some friends over for a few beers and laughs. 

Equally hot right now is our current housing market, which continues its long march higher.  All around the metro Detroit area, prices are rising on everything from single-family homes to condos, commercial real estate, and even vacant land.  Offers from prospective buyers are coming in high and fast, with many houses going at or even above list price.

These fast and furious offers are from buyers that are in fierce competition for a scant number of houses (it’s slim pickin’ out there right now).  It’s not uncommon for people to place offers on houses only to be outbid by other hungry buyers, especially on highly desired properties with features like brick construction or waterfront. 

So, if you’re a seller and find yourself receiving a large number of great offers at lofty prices, you’re probably yelling:

“Yee-haw!  We got offers for more than we ever expected!  It’ll be smooth, hassle-free sailing on the real estate river from here!” 

Then you’ll give a self-congratulatory high-five to your spouse or friends and grab another beer from the cooler…

Well, not exactly

While receiving a winning offer on your home is certainly occasion to toast your house-selling success thus far, there is a hugely important phase called the appraisal process that lies next; and, quite frankly, it can be a bit of a buzz-kill. 

The buyer’s lender needs to do their own appraisal on your house before the sale can move forward.  Put simply, the appraisal is the assessment of the value of your home by the buyer’s lender. 

The buyer may have offered a boatload of money for your house but that does not mean that the mortgage lender is going to cough up that amount for them. 

In fact, if the lender’s assessment of your house is below what your buyer offered it may not go through.  Your glory dreams of getting at or above list price may be in jeopardy.  This is why it’s critical that you understand the appraisal process when selling your home before getting too amped up about that cushy offer.

Get your own appraiser

Now, I always recommend to my clients that they get their own, independent appraisal done by a professional before their house even goes up for sale.  I find this removes a lot of the uncertainty and stress from the house-selling process as the seller gets a quality assessment of their home right away. 

There’s no need to wait for the buyer’s lender to make the appraisal or rely on anyone but your own professional to determine your home’s value.  You need to get your own appraiser. 

The appraiser is a real, live person who will come to your house and use approved methods to determine what your home is worth relative to current housing prices. 

An early appraisal ends the uncertainty early.  Knowing what your home is worth will make determining the price at which you should list your home much easier. 

You’ll feel much more confident in your listing price and know where it stands in relation to housing market prices.  Get an appraisal done early and right.

All of this appraisal knowledge makes you smart well before your buyer’s lender sends their own appraiser from God knows where.  

Armed with knowledge on your home’s value, you’re now ready for the mortgage lender’s appraiser

The appraiser will be specifically working for the mortgage company and will provide their own assessed value of the house for determining how much money they can lend your buyer. 

This appraiser is going to head over to your house and pull up to the curb, whether in a slick Mercedes or an old Ford Pinto, maybe in a fancy suit or in a mustard-stained t-shirt and tell you what’s wrong or needs to be fixed on the very place that was the site of many of your closest memories over the past years. 

Sounds fun right?

Sellers often perceive their house being worth much more than it actually is.  It’s often hard to separate your emotions from the house you may have spent years—in some cases—decades living in.

Most people have some level of emotional attachment to their house which can cause them to perceive their house as much more valuable as it’s actually worth.  Having feelings is a part of being human, not real estate valuation.  Just don’t let your emotions interfere with getting your house priced quickly and accurately.

What may surprise you during an appraisal is that the appraiser valuing your house will not give a rip about how you feel about your house.  Cosmetic features that fail to add to overall functionality (or even detract) like fancy kitchen cabinets, granite countertops, brand-new appliances, or that garage you’ve converted into an additional living space for your sweet Aunt Ruth may not factor in to the overall value of your house.

What will add value in the eyes of the appraiser are features that increase the overall functionality; features like a good roof, an attached garage, or a new air-conditioning unit or furnace.

Appraisers focus on basic use and function, not on fancy features.  An apple is an apple, whether it’s a Red Delicious or a Pink Lady—it’s still an apple.

Appraisers see houses in a similar way: Architecture style matters in an appraisal—like really matters.  A bungalow is a bungalow.  A brick ranch is a brick ranch.  Regardless of how fancy the bungalow or how luxurious the brick ranch, an occupant needs to have a home with a functional kitchen; a useable bathroom and shower; and a solid foundation.  Contrary to what you might think, the fancy marble installed in your bathroom is not a real factor in the value of your home. 

So why is my appraiser so harsh? 

One explanation could be that your appraiser made an appraisal at a lower price than you expected due to a housing market that is so hot that they struggled to find other houses comparable to your own that were sold recently to make an accurate comparison.  In other words, there may not just be good data on houses for your area.  Or, what is more likely, you’re letting your emotions get in the way of understanding the fair value of your house.  Understanding the way your appraiser approaches valuing your house is very important in countering this emotion.

Appraisers focus on basic use and function, not on fancy features.  An apple is an apple, whether it’s a Red Delicious or a Pink Lady—it’s still an apple.

And remember, Real Estate is often a business of opinions. 

An appraisal is essentially one person’s judgement of what your house is worth.  And, while two appraiser’s assessment of what your house’s value is likely going to be close, they are usually not the same.

After the Appraisal: The Appraisal Contingency Clause

After conducting an appraisal process, the appraiser will provide a specific value to the mortgage company.  The lender will use this appraisal to determine how much they are willing to lend your buyer to purchase your home.

Here’s the hard truth:

The mortgage company may not agree that the house is worth what you think it is

This is the reality for anyone selling their house to a buyer who is using a mortgage.  In this scenario, it may not matter what the buyer offered if they are relying on a bank to approve their mortgage. Ultimately, the bank needs to feel comfortable with two things: 1) the appraised value of the house and 2) the ability of the buyer to pay back the loan.

The lender does an appraisal of your home’s value because they want to avoid losing money in the event your buyer does not pay their mortgage lender after acquiring the home.  If the buyer cannot pay and the house is worth less than the money the mortgage lender loaned, the mortgage lender loses and they are now stuck with selling a house.  Clearly, this is a scenario the mortgage lender will try their best to avoid.

The downside for the seller is this:  If the property does not appraise for the purchase price that the buyer offered, the contract may become null and void.  The contract may be voided due to a clause called the “appraisal contingency clause.”  By this clause, the buyer is no longer obligated to follow through on the purchase due to the failure of the property to appraise for the full purchase price amount.  And, the purchase price may be completely open to renegotiation.  An appraisal contingency clause is put into a contract to protect the buyer and the lender.  For the seller, it can be a real let-down. 

For example, if your listing price is $110,000 and, let’s say, a buyer, afraid that they may be out-bid for your home, offers $120,000 ($10,000 over listing price) and the property is appraised at a mere $100,000, your sales contract may be voided due to the appraisal clause. 

If the house does not appraise for the purchase price, the buyer may then offer to make up the difference by using their own cash.  However, you better hope that the buyer has cash-on-hand!  Many do not. 

The lender’s appraisal may affect the buyer’s behavior.

If the appraiser does assess the house as being much less than the buyer’s initial bid, the buyer may then start thinking that they’ve over-bid and try to negotiate the initial offer down.  In fact, in many real estate contracts, there are words that state that if the property does appraise at the winning offer’s purchase price, the buyer can re-negotiate.

Alternatively, if the buyer really wants the house at the initial purchase price but the bank is unwilling to loan them the full amount, the buyer can put down their own cash.  This is a scenario that is quite common in today’s hot housing market.  Done quickly, this scenario may not be a big deal.  Yet, if it takes the buyer a few days to come up with the shortfall, this could delay the closing date of your house.  And, all of a sudden, the euphoria you felt from accepting a high-priced, initial bid has given way to annoyance at both the appraiser and the buyer.

Exceptions

It’s important to note that house purchases made in cash do not have the appraisal contingency clause

Also there are times when a seller should celebrate:  Sometimes buyers will offer an appraisal guarantee in the sales contract—an agreement by the buyer that they will pay the purchase price of the house even if the appraisal value falls short—they will make up the difference. 

This is more common during times like the present, where the housing market is hot and buyers need something extra like an appraisal guarantee to entice sellers to accept their offer.  So, if you’re a seller and receive a high-priced offer with an appraisal guarantee, you have reason to celebrate!  This is a good offer.

The Wrap-Up

To avoid an emotional swing, I always encourage people to understand their house’s value.  They should have an idea of what comparable houses in their area are going for.  Also, they should take a hard look at the condition of their house.  Is everything in the house fully functional?  Are there any major repairs that should be accounted for?  What minor repairs can be done with little hassle?  Having your own assessment done will bring any issues to your attention well in advance of the lender’s appraiser. Providing information to the appraiser on comparable houses in the area or on any major repairs that need to be done to the house can make the process easier for all parties.  Being forthwith with information on the house your selling can ease the appraisal process and ultimately make your sale quick and easy.  And, perhaps most importantly, leave more for BBQ’s, beers, and friends!