Tuesday, February 26, 2013

Appraisals: A Limiting Factor

As prices rise in the area and multiple offers are made on new listings, it's important to remember that, unless the transaction is for cash (meaning that there is no outside financing for the purchase), there will be an appraisal done before the lender will approve a loan. The appraisal is paid for by the buyers, but it is really for the benefit of the lender to ensure that the amount advanced to the borrower is covered by the security of the property value.

Appraisers are licensed and must follow strict guidelines in valuing properties. So, even if the seller receives offers that are far above and beyond the price they asked for the property (or even hoped to obtain), there will be no settlement without an appraiser agreeing that the price agreed upon by the sellers and buyers is a fair market value. Real estate agents are taught that the test of market value (and its definition) is the price a seller will take and a buyer will pay in a fair and open market and an arm's length transaction (arm's length means that there is no reason for the price to be other than market value, such as selling a property to a relative and not under any duress). Under this definition, the contract price, however high it may be, could be considered to have set the market value for that property at that time in that market.

However, appraisers can't see it that way. They must use closed comparable sales, nearby (usually, within one mile) and recent. If there aren't comparable sales for your contract sales price, the appraiser may not agree with the price. In the event of a low appraisal (the appraisal is lower than the contract price), the buyers and sellers will have to try to negotiate a new price or the contract will fall apart if the buyer can't get a loan commitment based on the low appraisal.

Sellers, be aware of this concern. It's better to get the best price you can that is supportable to an appraiser than to agree to a possibly fairy-tale price that could cause then entire transaction to fail.

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