“What’s the Big Deal About Appraisal? Isn’t it Just an Opinion of Value?”

Right now, lots of buyers are entering into bidding wars and this means they can be forced to pay top dollar. From the seller’s perspective, they are “testing the market” and pricing their homes higher than usual knowing buyers are willing to pay. It can all be very dramatic and exciting, but have no misconceptions; an appraiser can dump cold water on even the most exciting deals. 

Some buyers ask me, “What’s the big deal about appraisals? After all, isn’t it just an opinion of value?” Well yes, but it is also used by the mortgage company to make sure the house is worth what you’re offering. If a house is worth only $300,000 and you offer $400,000, then that’s an issue if you plan to acquire financing. After all, if you were to go back and sell the house a year later, there’s no way the lender would get their money back if it sold for fair market value (In this case: $300,000).

So what if a home doesn’t appraise? In that case, here’s what generally can happen:

  • The buyer brings the difference to settlement.
  • Seller drops the price so that the lender can approve the loan.
  • Both parties walk away.

Let’s focus on the 1st option: I was recently in a transaction where there were about 6 offers and my buyers were already offering $10,000 over list price. I come to find out that the winning offer was not only offering $15,000 over list price, but agreed to pay that extra $15,000 out of pocket if the house didn’t appraise. I kindly told my clients that I could never allow them to do such a thing. However, it begs the question: “Is there a scenario where a buyer should pay over appraisal and bring the extra monies to the table? 

The answer is yes. In fact, I have had buyers do it, but the circumstances need to be ideal. Think about it this way, when you do this you are essentially placing yourself “underwater” on the property since you’re not likely going to get the money back if you are to sell in the near future. This is the much-dreaded scenario many homeowners still find themselves in from the Great Recession and I don’t usually advise my clients to willingly put themselves there.

BUT…. Here are a few reasons it might be worth doing:

  • Prices in the area are rising
  • You can comfortably afford the extra monies
  • You think it’s a bad (or low) appraisal
  • You MUST have the house
  • You plan to live there for a while

Whenever considering paying over appraisal, it is imperative you closely consult with your Realtor to make sure it is the right move. While no Realtor has a crystal ball, they can give you insights into whether that money will be recouped in the future. Overall, appraisals are one of the least talked about parts of real estate transactions but they are an important consideration if you are to successfully get to the settlement table.

I would be happy to showcase your question in my next installment. Go ahead…Ask me anything! If I use your question, I will send you a gift card of your choice or donate money to a charity on your behalf.

Seth Lejeune – 610.804.2104 – seth.lejeune@foxroach.com / Berkshire Hathaway – Fox & Roach

Seth is a licensed REALTOR  and small business owner based in Philadelphia, Pennsylvania. 


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