The Property Appraisal: Taking the Emotion Out of Your Home Purchase

by Steve Kimmey.

It is common for my Baltimore real estate clients to have a good bit of emotion in the purchase of their home. Once they have found the home that they love, made an offer, gone through negotiation,  agreed to terms with the seller, and placed a deposit of their hard earned savings into escrow, there is a lot at stake. Oftentimes, they begin to worry whether they are paying a fair amount for the home and want to know just how are they protected. This is when I remind them that their lender will not allow them to borrow more than the home is worth and to be sure, an appraisal will be done.

A real estate appraisal is simply that -- the expert opinion of a certified, state-licensed professional who determines the value of a piece of property used to protect the bank from getting stuck with property that's worth less than their investment and to protect you from paying too much for a house simply because you fell in love with it.

There are two main appraisal methods for residential property and both are normally used in an appraisal to find the closest current market value. The sales comparison approach uses three or four similar homes that have sold in the area, which are comparable in such details as age, lot size, square footage of finished and unfinished space, style of house, number of bedrooms and baths, as well as other features such as garages and fireplaces. These similar homes are commonly known as comparables, or comps for short, and must have been as recently sold as possible to reflect the current conditions of the market.

The cost approach is used to estimate the cost to replace the home on the given lot if it were destroyed. This type of estimation is more commonly used with newer construction. The appraiser will consider the land value as well as depreciation to determine the property's worth.

Information from a number of other sources is used for the property value determination such as data from local multiple listing service or the local government property records. However, the appraiser should always make a firsthand visit to the property to inspect it inside and out, make measurements, and take notes on any additional information that could affect the value.

Now that the appraiser has sent his opinion of the property's value to your lender, what happens next? Well, if your Realtor did a good job with the market analysis when you were discussing an offer range, then you should be able to sit back and breathe a sigh of contentment, and maybe even rejoice in getting the home for a bit less than the appraised value giving you some equity from the day you move in! However, sometimes these things don't work out quite as planned, and the appraisal comes in lower than your purchase price. What now? Are you losing the house? What about your deposit?

First, you should not panic. The purchase contract you signed has contingencies for these situations with possibilities to handle them. It is a good idea to examine the reasons that may have caused the low appraisal. Maybe there are repairs or maintenance the seller could correct. If that's the case, the appraiser may take a second look and adjust the appraisal.

With the new lending laws, sometimes the appraiser is not local and may be unfamiliar with the area where the property is located. Maybe the appraiser missed an important detail or even a good comp that your realtor used and will take it into consideration. In cases where the appraiser will not budge or even reconsider their opinion, it is not uncommon to order a second appraisal in hopes it will be done by someone who understands the local housing market better.

Your lender, of course, will not move forward with your loan until the low appraisal is satisfied in some way. It's possible for you and the seller to negotiate compromises that will satisfy the lender. perhaps the seller will lower the purchase price to the appraisal amount, or you can increase your down payment to cover the difference. some combination of these things can easily take care of the deficiency so that the transaction may continue.

If, however, the difference is too large and negotiations cannot  close the gap, then you must revert to the financing contingency of your purchase contract which allows you to cancel the contract and receive any deposit you paid the seller if you don't get the financing agreed to in the terms. Unfortunately, this will mean you are back on the market looking for another home and the time, energy and emotion of the first transaction will weigh heavily upon you as you compare all of the new homes you tour with your realtor to the first one you fell in love with.

This is why a home appraisal is more than just added cost to your bottom line as a home buyer. It is really a protection for everyone involved in the home-buying process, and will only serve to help you make a more informed decision about purchasing a home.


Steve Kimmey helps Baltimore real estate clients find homes for sale in Baltimore City and surrounding communities.