Just about everybody has heard of an appraisal and knows what it is- an assessment of a home's value based on empirical evidence like recent sales, replacement costs, and the subjective opinions of underpaid appraisers hurrying from one gig to the next. What many Buyers don't know is that, even though they get to pay for it, the appraisal isn't for them, it's for their bank. While it's true that the bank wants you to know you're getting your money's worth, they are really much more concerned about whether they are getting their money's worth. See, most of the time, banks are the ones who are really buying the home, even though you get to have your name on the title.
[caption id="attachment_2024" align="alignright" width="300" caption="Appraisal Ape says,"Results are relative. I'm just doing my job!""][/caption]
The true purpose of the appraisal is to assess the dollar-figure at which the bank could reasonably expect to sell your house in the event of a foreclosure. They have to take the worst-case scenario into account to make sure they don't get stuck losing any of their money if they have to take your house back. This makes the appraisal a tricky piece of the buying process, because banks won't lend you more than the amount of the appraised value. That means that if your appraisal comes back lower than the agreed-upon purchase price, you'll end up having to cover the difference or re-negotiate with the Seller, either of which could potentially cause the deal to fall apart. Appraisals are especially critical and unpredictable these days, with regulations on appraisers and loans tightening daily as a result of the loose standards of the past several years that contributed significantly to the recent market slump. It is no longer a foregone conclusion that the appraisal amount will be high enough to cover the spread.
I am not suggesting that appraisals aren't accurate or useful. They most certainly have their value. I just think it's important to let Buyers know up front what some of the potential hurdles and complications might be. That way, there won't be quite so much flop sweat to clean up the week before closing when we all huddle together gnawing our collective fingernails, waiting to find out if the appraiser's thumb will point up....or down.
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