A few of my recent buyer clients have had similar questions regarding the importance of an appraisal, so I wanted to share some of the impacts they can have on real estate transactions. 

When you get a loan on a property, an appraisal is done during escrow. If your contract states that you have an appraisal contingency, the appraisal should be done during the due diligence period for your appraisal contingency. There are a few things that can happen when you get an appraisal. 

Appraisal Comes in at Purchase Price

Your appraisal might come in at the purchase price you paid. Appraisers are notified of the price you are in escrow for, so they are prepared with that price in mind when they go to the property. The question becomes – do they believe the property is worth the price you are paying? Their opinion is subjective, as all appraisals are subjective. It is one person’s opinion of value. 

If you get an appraisal that comes in at the purchase price, it should reassure you that the price you are paying is fair and with the guidance of your broker, you should be able to remove the appraisal contingency because the property appraised! This is very good news. 

Appraisal Comes in Above Purchase Price

Sometimes appraisals will come in higher than the price the buyer and seller agreed upon. If this is the case, a buyer does not need to share the appraisal with the seller. This is a common misconception, and I’ve had this question from buyers several times in my career. You as the buyer ordered the appraisal, not the seller. You paid for the appraisal, not the seller. With this information, you can quietly be satisfied knowing that you have more equity in the property than you thought! It is wonderful news, and does not mean you need to pay the seller more for the house. Situations where the appraisal might come in higher than what a buyer pays might include a multiple offer situation where buyers are competing for a property and there is strong interest. Another scenario might be where a property sells very quickly with low days on market and the appraiser feels the listing was priced aggressively for the neighborhood. 

Appraisal Comes in Below Purchase Price

If your appraisal comes in low, a few steps can be taken. Provided you have your appraisal contingency and you are still in contract, you could cancel the contract and receive your initial deposit back. Another option would be to re-negotiate the price based on the new appraisal. Send the seller the appraisal, and request the price be reduced to the appraised value. They can accept, decline, or counter the request. They are not required to sell the house for the lower appraised value, it is a negotiation. 

If a buyer’s appraisal comes in low, they request a reduction to the appraised value, and the seller declines or counters somewhere in the middle, a buyer could cancel the contract or decide they really want the house and move forward. If they move forward, they would have to increase their down payment. This isn’t always a bad thing and I’ve had buyers bring more money to the closing table so they can get the house of their dreams. I’ve also had buyers walk away, it’s really up to the buyer in this scenario to determine how badly they want the house if the seller won’t agree to reduce the price to the appraised value.