Buyer Be Aware: Appraisals Matter

When buyers pay cash for a property, they can submit an offer contingent on an appraisal to make sure the value the appraiser reaches is at least the agreed-upon contract price. But not all cash buyers choose to purchase an appraisal.

When buyers take out a mortgage loan in order to finance a purchase, their bank will typically require an appraisal to be done. When lenders order an appraisal, the purpose is to reassure the lending institution that the value is deemed to be at or above the contract price. Your buyer’s agent can help you write your offer so that it is contingent upon financing and appraisal.

In the event the bank-ordered appraisal indicates a value lower than the contract price, the buyer and seller typically have a chance to negotiate. The seller can (but is not required to) reduce the contract price. If the seller does not agree to reduce the price to the appraised value, the buyer would need to pay the difference in order to proceed with the purchase. This is because the bank will not loan more than the appraised value.

There may be circumstances or variables that are specific to a certain property or lending institution, so always seek guidance from your lender, real estate agent, and a real estate attorney if contract issues arise. But in general, you can expect mortgage lenders to require an appraisal in order to fund a home loan.

THE TAKEWAY

Appraisals are one way buyers, sellers, real estate agents, and lending institutions attempt to confirm that the value of a property that is under contract meets or exceeds the agreed-upon contract price.