Love Selling Your Home – Week 8
This is the eighth article in the series “Love Selling Your Home: Minimize Your Stress, Maximize Your Profit,” a step-by-step guide to selling your home. This series takes you through the entire home-selling process — from finding a real estate agent to settlement day.
Just because your home is under contract doesn’t mean it’s time to celebrate just yet. It’s time for your home to be appraised, and the results could sidetrack the entire transaction.
This is an essential step in the closing process. The sale of your home can’t move forward until the appraisal is completed and the lender has given its approval.
You don’t want the appraised value to come in lower than the contract price. If so, the lender won’t approve a loan for more than what the home is worth. That means that the price you’ve set for your home is not going to happen!
Now is a good time to understand this process.
Here are the ABC’s of an appraisal and what you can do to protect yourself as a seller:
Home Appraisal 101
What is an appraisal?
- An appraisal is an unbiased professional opinion of a home’s value that the lender uses to determine whether to lend money to the buyer. Usually, the lender will order the appraisal, but the borrower will pay for the report.
- Don’t confuse an appraisal with a home inspection, which is entirely different. Appraisers are not home inspectors looking for leaky roofs, testing appliances, etc. Your buyer will need to get a home inspection after the appraisal comes through.
Why does it matter?
- The lender wants to make sure the buyer is not over-borrowing and that this is a sound investment. The lender wants to protect itself in case the buyer defaults on the loan. The lender also wants to ensure that this home exists and is habitable.
- No appraisal needed for all cash buyers. Since the buyer doesn’t need a loan, you won’t have to deal with a bank or appraisals at all. That’s a big plus as a seller.
What does it entail?
- An appraiser will tour the home and take notes on how it compares to other recently sold homes in the area. A licensed appraiser’s report is more detailed than a comparative market analysis and is the only valuation report a lender typically uses.
- The valuation is based on market trends, supply and demand, and duration on the market. It also considers any extenuating factors, such as upgrades or being on a higher floor or an end unit. It will also take into consideration the home’s condition, location, and features.
- The report will also include statements on any issues that may hurt or help the property’s value. Since it’s never an “apple-to-apple” comparison, the appraiser will make adjustments to the appraisal for some features of a home — a finished basement, a coveted view, updated appliances or HVAC systems. Remember, some improvements don’t add as much value as you would like … such as a new half bath, landscaping, etc.
Be Aware of Appraisal Law
The appraisal process underwent changes with the passage of the Home Valuation Code of Conduct. This law was meant to make appraisers more independent and not “hired” by the real estate agents, the buyer, the seller, or bank handling the transaction.
But in some cases, appraisers may not be local to the area where they were appraising homes, especially when appraisal management companies are involved.
There’s been some questioning of how well these appraisers know the neighborhoods and the “true” value of a home when an appraisal comes in too low.
What Can You Do to Protect Yourself?
- You want to have an appraiser who knows the local area and has worked in your neighborhood beforehand. This is someone who could recognize any skewed comps if that’s ever the case. If there is a lower appraisal from one of these appraisers, we can make a “case” for another appraisal. If you are buying a new home, when you sell, it’s important to use a local lender who will hire a smaller list of seasoned appraisers.
- As a seller, you can obtain an appraisal yourself before listing your home to help determine the asking price. You could give this prelisting appraisal to the buyer’s appraiser to add to the data and perspective of the final report.
- You should question a low appraisal. Please review this to ensure that nothing was overlooked or inaccurate in the report (see more details below).
What If You Get a Low Appraisal?
If an appraisal comes in lower than the contract price, it may mean the end of the sale with this particular buyer. However, there are steps you can take to help avoid this and also move the sale along.
It might be worth the time to work with this buyer rather than starting all over again, but you may have to do that if many of the actions below don’t work.
Provide details on any home improvements to the appraiser so nothing is missed. Your agent can contact the lender, who will then connect with the appraiser hired to evaluate your home.
Ask to review the appraisal to see if any adjustments were made, especially if you submitted information to the appraiser. A lender has to comply with the request within 30 days.
Appeal the appraisal for a reconsideration of the home’s value. Provide the comparables you and your agent think represent the home’s value better and why. You will need to identify any discrepancies between the appraisal and the home’s improvements or unique features.
Ask for another appraisal, but you would have to pay for it. However, if it’s an FHA loan, an appraisal stays with that home for 4 months, so you can’t ask to switch lenders or get a new appraisal. Buyers, on the other hand, could switch lenders and start over with a new appraiser.
Ask the buyers if they are willing or able to pay for the higher contract price and make up the difference themselves. Some buyers may be willing or able to make a larger down payment. If it’s a tight market, the buyers may feel the pressure to pay since there could be another buyer in line who is able and willing.
Renegotiate with the buyer and offer a lower price or pay for closing costs. If you don’t have any other potential buyers, you may need to make such accommodations so that the sale can proceed.
If any of this feels overwhelming, don’t worry, these are the types of things I “worry” about in the background so everything goes smoothly on your end. 😉
