An appraisal is defined as “an estimate of value, as for sale, assessment, or taxation,” according to dictionary.com. As a potential home buyer or seller, why is the word appraisal important to you and your transaction?
If you are purchasing a property and taking out a loan to do so, your appraisal coming in “at value” is a crucial piece needed to complete the puzzle. Included in most offers is something called an appraisal contingency, meaning your offer — and the purchase — is contingent upon a written appraisal coming in at no less than the purchase price.
Mortgage lenders and banks require an appraisal to assist in determining the amount of money to lend for a home loan. The bank’s appraisal is also required as the property being purchased will be the collateral for the home loan. An appraisal will be required at time of refinancing as well.
There are three primary types of real estate appraisals that may be used, including the sales comparison approach, the cost approach, and the income capitalization approach. The sales comparison approach (also known as the market data approach) is essentially a comparative market analysis, and is the main method for determining the value of single-family homes. Similar to what your agent should have done when determining your offer price, the appraiser will use recently sold homes as a comparison for the property you’re attempting to purchase.
APPRAISAL GONE WRONG
There is another step to the appraisal process, unknown to many consumers. The report is reviewed and approved by the underwriter, but it also needs to be approved by the investor.
Allow me to set the scene for you:
As are most of our homes in Tahoe, the property you’ve made an offer on is very unique. It encompasses the “Old Tahoe” charm and is an architectural masterpiece, at least it was when built in 1940. It’s safe to say your potential home has a little quirk to it.
You had your inspections completed and successfully negotiated a repair credit that will be credited toward your closing costs. You and your agent talk through what it means to remove your inspection contingency and sign the contingency removal document.
Great, you’re feeling good. Who says buying a house is so hard? Next up, let’s get that appraisal contingency removed.
Both you and your agent speak to your lender, who says the appraisal came in “at value.” Your lender gives you the green light to remove contingencies, as the underwriter explained it’s clear on her end. You remove the appraisal contingency and now you’re one step closer to owning your own home.
But wait! An email comes in from the lender advising you not to remove the appraisal contingency (although you already have) because the investor doesn’t agree with the comparable properties provided. In a jumbo loan, a second evaluation by what’s known as the investor is required. Now you’ve removed your leverage for the appraisal and the price is not approved by the lender, so you are left in a waiting game of whether or not it will be valued at ask price.
Why would a lender give you the green light to remove your contingencies if the file wasn’t complete? Well, it could be one of two reasons. Perhaps, your lender is not familiar with jumbo loans and is unaware a second evaluation will be required. The other could be carelessness.
If you’re working with a lender that can perform loans in-house, they may be able to save this deal. Should the investor not approve of the appraisal, the buyer may have the option of using a different loan structure, likely at a higher interest rate, to ensure their loan will close.
If the buyer is not able to restructure the loan, the only option may be to cancel escrow. If the buyer cancels escrow, once the contingencies are removed, their earnest money deposit (typically 3% of the purchase price) could be forfeited to the seller, which is a less than ideal situation.
The story above is something you never want to experience when you’re mid escrow.
If you find yourself wondering how to avoid the scenario mentioned above, my advice would be to ensure you are working with an agent and lender who have experience in jumbo loans.
For years, Clear Capital was one of the largest local employers, if not the largest, in Truckee — and they are the leading experts in our area regarding appraisals. When choosing your real estate agent, and lender, it’s important to trust them in every aspect. You trust they have your well-being at heart, you trust their word when you’re having difficulty understanding the legal jargon that makes up the contract, and you trust them on when it’s clear to remove your contingencies. An educated agent and lender will ensure you’re covered on all your bases before releasing any of your three contingencies, including the appraisal.
After reading this article, my hope is that you’re a bit more familiar with it all.