A Primer on Appraisals

In most residential mortgage loan situations the loan amount is tied to the market value of the property rather than the purchase price. Market value is determined via an appraisal, which is a professional opinion on the value of a particular property provided by a licensed or certified appraiser during the loan approval process. Buyers generally pay the $400 to $600 cost of the appraisal at or prior to closing. The time period from when the appraisal is ordered until the appraisal report is returned to the lender is usually seven to ten business days but can be delayed during the peak of the real estate market.

The appraisal process usually begins with a lender ordering the appraisal from an independent appraiser. The appraiser is not an employee of the bank and the appraisal process is designed to be free from any influence by the lender or any other party to the transaction. After the appraisal is ordered, the appraiser usually visits the property to make note of important details and characteristics of that property, including: location, condition, age, size, finishes, and updates. For VA, FHA, and some other loan types, the appraisal may make note of repairs or replacements the seller will need to complete prior to closing. Using the details and characteristics of the property, data from recent sales of similar properties, and the current dynamics of the local market, the appraiser compiles a report with their opinion on value and the supporting data and information used to reach that opinion.  

Assuming the appraised value is at or above the purchase price and there are no issues with the details or data included in the report (and any required repairs or replacements are verified), the appraisal component of loan approval is deemed satisfied. When the appraised value is less than the purchase price or there are errors in the report that need to be corrected, the options available to a buyer depend on the terms of the contract and the additional terms negotiated during the attorney approval period.

When there are errors in the appraisal report or the appraiser’s valuation is not supported by the market, the buyer may ask for a reconsideration of value. If a reconsideration of value is not successful or warranted, the buyer’s options depend on the terms of the original contract and those terms added to the contract during the attorney approval period.

If an appraisal contingency is included or has been added to the contract, the buyer should be able to terminate the contract and receive a refund or their earnest money. However, it is customary for the buyer to give the seller the opportunity to lower the purchase price to the appraised value with the contract remaining in force. If an appraisal contingency is not included in the original contract and has not been added during the attorney approval period, the buyer’s only option may be to bring additional funds to closing to bridge the gap between the purchase price and the appraised values. For most buyers, the prospect of bringing additional funds to closing is problematic so ensuring that the terms of their purchase include an appraisal contingency should be a priority.

Each and every real estate transaction is different. Whenever purchasing a property, you should consult with a residential real estate attorney to fully understand your rights and responsibilities during the closing process. The real estate team at Lavelle Law, Ltd. is always happy to assist buyers and offers a no-obligation initial consultation. For any questions regarding any or all real estate matters, you can contact Kevin Mitrick at kmitrick@lavellelaw.com.