Once you get in touch with a great real estate agent, they’ll start throwing you terms that you’ve probably heard of but might need a crash course.
One such term is home appraisal. For example: “Once we start submitting proposals, we’ll want to schedule an assessment as soon as possible.”
So what is the home appraisal process? Why would you need to estimate the value of a house if you and the seller have already agreed on a price? Why is it urgent to get a home valuation at closing? And what should you do with the information?
What is a home appraisal?
A home appraisal is when an independent third-party appraiser comes in and gives an opinion. assessed value a home that is under contract (i.e., in the process of being purchased).
To avoid confusion, here’s how Estimated Value differs from some others:
Assessed, appraised and market value
- Assessed value determined by a licensed third party appraiser and used to convince your lender that they won’t let you borrow more than the house is worth.
- Assessed value this is what the city thinks the house is worth and uses this number to calculate property taxes.
- Market value this is what the market thinks the house is worth based on demand, supply, etc. Essentially, this shows up as the offer price that the seller accepts.
So when is the value of a home appraised and why?
When is an appraisal done during the home buying process?
The assessment is usually carried out during the due diligence period.
Due diligence, as you may recall, is the closing period when you, the homebuyer, can still opt out without any consequences.
An appraisal is an important part of due diligence because it tells you and your mortgage lender how much a home is actually worth, no matter how much the seller thinks it costs.
But then again, if you and the seller have already agreed on a price, what does a third opinion matter?
Why do you need a home appraisal?
Even after the seller has accepted your offer, home appraisal does several things:
- This ensures that you are not deceived.
- This gives you some bargaining power if it turns out to be low.
- It shows your mortgage lender how much their collateral is worth.
Unpack no. 3 because that’s really the main reason the evaluation is done.
Have you ever wondered why mortgage interest rates (5%) are so much lower than credit card interest rates (30%)?
This is because mortgages are a type secured loanswhich means they are supported pledge. Collateral is what a lender can take from a borrower in the event of default on a loan.
In the case of a mortgage, your home is your collateral.
Therefore, mortgage lenders want to get an objective, professional opinion on how much their collateral is worth before lending you money. They can’t rely on what you and the seller think it’s worth, hence the valuation.
What does an evaluation report look like?
Check out this sample appraisal report courtesy of James Dougherty’s appraisers.
Note how the appraiser takes into account not only the condition of the home and floor plan, but also the appraised value of “comparable” properties nearby.
Now let’s say you just received your own evaluation report. What to do with it?
What do I do with the information in my assessment?
You can read it all, but the most important number is right at the top: the estimated amount. This number will determine your next move.
(Keep in mind, too, that the seller doesn’t see the rating – so the ball is in your favor!)
- Estimated value = offer price. If the estimated value matches the offer price, you are in gold. The seller valued his own property well.
- Estimated value > offer price. If the appraised value is higher than the offer price, it simply means you got a good deal. Don’t tell the seller!
- Estimated value < offer price. If your valuation is below the offer price, things get a little more complicated.
Let’s say the seller accepts your offer of $400,000 and their estimate is $390,000. It creates valuation gap in the amount of 10,000 US dollars.
Valuation gaps can be a big problem for both buyers and sellers because, as you may remember, lenders will only lend just enough to buy a property. rated amount. If the buyer cannot make up the difference, they may have to back out of the deal.
Therefore, as a buyer, you have several options for solving the problem with the assessment:
- Fill in the gap with cash. If you have $10,000, you can simply close the gap with cash to complete the sale.
- Re-negotiate with the seller. Even in a seller’s market, a seller can lower the price to fair market value to avoid the hassle of re-listing their home for sale.
- Request another estimate. If you are certain that the home has been undervalued, you can ask your lender to order another appraisal.
- Return from sale. If you can’t make up the shortfall, or you just don’t want to overpay for the house, you can simply pull out of the sale.
It is worth noting that you can refuse with impunity and keep your deposit if:
- You are still within the due diligence period, or
- You and your REALTOR® have written into your contract a standard contingency that allows you to bail out after a low estimate.
So, wait a second. Would removing valuation contingencies from your offer make you more attractive to frontline sellers?
Yes!
How can covering gaps and opting out of evaluation make your offer more attractive to sellers?
Home sellers don’t like ratings. At best, they report that they have priced their home too low. At worst, they give buyers space to negotiate or post a deposit.
This is why sellers love it when you waive some (or all) of your valuation rights.
To begin with, both of these methods are associated with high risk and high profit. Talk to your REALTOR® before signing a contract.
Covering assessment gaps
When you add a valuation gap cover to your bid, you agree to cover all or part of the gap between the valuation and the bid price.
For example:
- You make an offer of $400,000 with $20,000 Evaluation Gap Coverage included.
- The estimate is $370,000.
- This means you will pay the seller $390,000.
Estimation gaps are your way of telling the seller, “If the estimate is low, don’t worry, I got you.”
Keep in mind, however, that you will need cash to fill the gap as your lender will not cover it.
Rejection of evaluation
A valuation waiver is an agreement between you and your lender to skip the valuation process entirely.
Sellers when you refuse evaluation | Source: Giphy.com
And sellers love it.
Opting out not only saves you about $400 in cash on the appraisal, but it allows you to fund the entire purchase amount as your lender formally agrees to accept the offer price as the appraisal price.
However, the requirements for not grading are steep.
You will need a great loan and a 20% down payment, and your lender will need to approve the specific property to decline the appraisal.
But because waivers are so attractive to sellers and can save a lot of time and money, it’s definitely worth asking your REALTOR® and lender about this possibility.
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essence
Home evaluations may open a large can of worms at closing time. Fortunately, they can often be a win-win for buyers; a high score means you’ve made a deal, while a low score may give you a reason to negotiate.
In a seller’s market, you can make a big difference by adding some gap coverage (if you have the money) or perhaps even dropping valuation entirely. Want to create the best offer to win in a crowded market? Go further here:
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