For any type of Mortgage Financing, it is a standard practice for a prospective lender to order an appraisal of a subject property, in an effort to protect the investment for both the Lender and the Home Buyer.  Unfortunately, these appraisals can have profound effects on the outcome of real estate transactions.  In today's market, for instance, we are starting to see more and more deals fall through because of an appraisal that came in under value.  Real Estate Agents are being made to act as loss mitigators, attempting to find some sort of common ground between a Buyer and a Seller, in the aftermath of an appraisal.

The ideal scenario, in this instance, would be for the Seller to reduce the sale price to appraised value.  Unfortunately, if the difference between the sale price and the appraised value is too great, many Sellers are often either unwilling, or unable to adjust the sale price appropriately.  From this point, the Home Buyer must provide the excess proceeds to make up the difference, or else lose their purchase by failing to meet their financing contingency.

In a less damaging, more acceptable scenario, a Buyer may elect to share the burden with the Seller, each party contributing a certain amount to make up the difference between the appraised value and the sale price.  However, this does not happen very often in today's market, as many Buyers find themselves in need of closing cost assistance, and, therefore, unable to come up with any additional funds above and beyond that which was originally planned and set aside for their home purchase.

It's been said that nearly 30% of real estate transactions in our area are lost for this very reason....who's to blame?  Is it really worth it to challenge an appraisal??

As agents, it's our responsibility to prepare our clients for the worst case scenario.  When we list a home, if it is priced "correctly", according to fair market value (based on a Comparative Market Analysis, of course...), in theory, there shouldn't be any problem with regards to the appraisal.  Unfortunately, this is not the case, as many appraisers will tell you (as I have been told) that the comparables we select as a basis for establishing list price, do NOT necessarily correspond to that of an appraisal.  Not only this, but communication with an appraiser is very limited, and many times, there doesn't seem to be a rhyme or reason for how an appraisal is put together.  As Agents, working with our respective lending partners, we are forced to simply accept these appraisals without question.  On the other hand, how will we ever acheive higher property values if the appraisals keep pushing values down...?  Should we work strictly with Cash Buyers??  It presents a very complex dilemma, and nobody seems to have the correct answer.

As a caveat to Buyers and Sellers in the Metro Detroit Real Estate Market, be wary of the appraisal!  It could make or break a deal!  But remember that every situation is different - local Markets with relatively stable property values may not have this problem.  Be sure to discuss with your Agent and their preferred Lending Partner exactly how an appraisal could affect your real estate transaction.

Most Buyers understand that EVERY deal runs the risk of falling apart, based on a number of contingencies outlined in a purchase agreement.  As agents, we do our best to ensure that things stay together and run smoothly, but not every transaction is created equal!  Think of it like this...if and only if the terms of a stated contingency are met will the contract proceed as written.  Here is a list of the most common contingencies:

Inspection

The homebuyer will be allowed to conduct a private inspection, at their sole expense, in an established timeframe from the date of seller acceptance of the purchase agreement.  This is a fundamental part of most sales contracts, and it solidifies a Buyer's commitment to purchase the subject property.  Upon completion of said inspection, the homebuyer is presented with 3 options: 1. Accept the property condition as-is, 2. Express dissatisfaction, and request a release from the sales contract, or 3. Request that the Sellers complete certain repairs at their sole expense or modify the purchase price to reflect such.  This becomes another negotiating point before the sales contract is to proceed.

Financing

Without being able to secure the proper financing, a homebuyer will be unable to fulfill the terms of a purchase agreement, no matter the circumstances.  Normally, a purchase agreement will state how long a prospective homebuyer will have to submit a mortgage application, and, ultimately, secure financing (typically 30-45 days).  If after such a time, the Buyer cannot obtain financing, the purchase agreement becomes null and void, and both parties are released from the contract.

Appraisal

As is required with government-insured loans, once a Buyer is satisfied with their home inspection, their loan officer will order an appraisal to protect the interests of both parties.  Fashioned in a very similar manner to that of a Market Analysis, an appraiser will compare a subject property to those in the same neighborhood with similar features, in an effort to establish a home's current market value.  Once this number is obtained, it is cross-referenced with the sale price in the purchase agreement.  If the appraised value comes in at or above the sale price, the terms of the purchase agreement proceed as usual, and a Buyer's mortgage application is submitted to underwriting for final approval.  On the flip-side, if the appraised value is less than the sale price, it presents another necessary negotiating point.  If a Seller is unwilling to execute an amendment to reduce the purchase price to appraised value, the Buyer will be unable to obtain financing, and the deal will fall apart.

Short Sale

"Subject to third party approval." - This is the red flag that points to a short sale contingency.  Very simply, the Seller's bank is required to approve the sale before the terms of the purchase agreement are able to proceed as usual.  Depending on how the Short Sale Addendum is written, various other contingencies, such as inspection, may occur before or after bank approval.

Of course, other various contingencies may be incorporated into a purchase agreement, but these are the most common in the current real estate market.  Work with your agent to determine how your home purchase will be affected by the contingencies of a purchase agreement.