When a buyer obtains a loan, the lender (not the buyer) will order an appraisal to determine the property’s value for the loan. Though appraisers use data (closed sales) from the current market and have strict guidelines, appraisals are slightly subjective because the appraiser selects which comparables he/she wishes to use when there is an option to choose and the adjustments based on condition, view, etc. I always say, you can send three appraisers in on the same day, 5 minutes apart and get three different values within a certain range. Usually only one appraisal is ordered. If it is a large loan, the lender might request two.
Typically, the listing agent is contacted directly to provide access. Sometimes the listing agent will tell the cooperating agent when it is scheduled, and sometimes not.
The appraisal appointment is usually fairly quick. The appraiser takes pictures (make sure there is a smoke detector in the unit), measures the space, and asks a few questions. If a condo, they need to take a picture of the back of the building as well.
When you are involved in a transaction with financing, it is a good practice to attend the appraisal and go prepared with information in hand (a floor plan and closed sales print outs). You should NOT force your information packet onto the appraiser, but you can provide a copy of the floor plan and ask him/her if they would like to look at your comparables. Sometimes they will listen and gladly accept your printed comparables, and sometimes they won’t touch them. The appraiser will ask you information about the house or condo. You might be asked:
year built, maintenance fee amount, what does the maintenance include, when were the improvements made, are there any special assessment, how many parking spaces does the unit have, etc
Keep in mind, that appraisers have strict guidelines when doing their reports. They cannot value upgrades dollar-for-dollar, nor can they ignore the most comparable sales within a building. If you have direct knowledge of a sale that could possibly be excluded (like the seller sold it to his sister for a deep discount, or the unit was gutted inside), you can share that information.
What if the property does not appraise for the contract sales price?
It depends. You might ask, “What does it depend on?” It depends on what the contract says. In real estate, this is a common answer because it typically boils down to what is on the contract.
Things to look at on the contract:
- Is there an appraisal addendum? A special clause stating that the contract is contingent on the property appraising for the contract sales price? The financing contingency is not contingent on the property appraising for the sales price– it only needs to appraise at a value sufficient to provide the loan (the financing amount is specified on the first page of the contract).
- Are you within your financing period? The financing period deadline is a critical date.
- Will the buyer qualify for the loan at the lower appraised value?