Last post we had gotten a property under contract and had the inspection done. The next key item that will occur before we can close on a property is the appraisal.
If you missed the last two posts: The Home Inspection, The Sales Contract
The Appraisal
If we are using traditional financing to purchase a property the bank will order an appraisal to get an estimated value of the property.
This is done to ensure the value of the property is in line with the price you are purchasing it for.
Thus…
- Protecting you from overpaying
- Protecting the bank from lending more than the property is worth
Note: - you generally have to pay for it and will see it as a line item in your closing statement.
Here’s an example from the loan estimate on a property I purchased. You will see under section B the first line item is appraisal cost. These can cost anywhere from $300 to $500.
Factors Used In The Appraisal
- The appraiser will factor in the condition of the property and then compare it to similar properties in the area.
- They will then compare recent sales of similar properties in the area to come up with fair market value.
What Happens if the Appraisal Comes In Low?
If we happen to receive an appraisal below the sales price there are a few options:
We can hire a different appraiser to give a second opinion
- That appraiser may give a higher value as the estimates can and do vary between appraisers (you will have to pay for that additional appraisal though)
We can bring more cash to the table
- Let’s say you are putting 20% down on a 200K property. However the appraisal comes in at 190K. The bank is only going to lend you 80% of the 190k so you would need to bring an additional 8k to closing.
We can go to the seller to negotiate the price down or walk away from the deal
- If the seller is motivated and the appraisal comes in low you should absolutely ask if they will come down on price.
- If the seller won’t come down and you feel like you are overpaying than you can execute your financing contingency (discussed in the sales contract post) and withdraw from the deal.
Conclusion
So as you can see – the appraisal can work in our favor to get a better price and also lets us know if we are overpaying for a property.
Regards,
Mitchell J
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