It is not always true that the price a buyer is willing to pay, i.e., market value, is going to be higher than an appraisal nor is it always true that an asking price is going to be higher than an appraisal. An appraisal is not normally requested or performed until after a contract is signed and a mortgage is requested. They are customarily requested by the lender. Thus a selling price is normally set prior to an appraisal.
An appraisal is an "educated and technical" price evaluation by a trained and licensed appraiser, whereas, most selling prices are determined by a CMA (comparative market analysis) performed by a Realtor and a meeting of the minds between that Realtor and the seller. So, even though the processes are similar, the "appraisial" is considered by lenders to be more accurate, thorough, and a better representation of the true value of a property. It will govern the lending amount.
I am an Accredited Buyer's Representative and do not write contracts without an appraisal contingency. It is for your protection because if that contingency is not present and the home you are purchasing is appraised at less than the agreed price (and you are past your due diligence period), you will be required the provide the difference out of your funds. If you did not have the additional funds and voided the contract at a minimum you would lose your earnest money and if the seller chose they could sue for performance.
Bottom line - never assume the asking price will be the same as the appraised price and always include an apprasial contingency in your contracts.
The appraisal contingency is in place to protect the buyer that in the event the home does not appraise for the purchase price, the buyer does not have to close the gap between purchase price and appraised value by depleting their accounts if they even have the money to deplete. No one wants to over pay for a property... no one wants to overpay for anything for that matter. If a borrower is doing a 100% loan and the home does not appraise then the loan cannot go through unless the seller reduces the purchase price to the appraised value.
With the contingency, you have the opportunity to go back to the seller and renegotiate the sales price of the home to fit within the appraised value. If you are purchasing a home in which you know the appraised value is less than the sales price, then you do not need the contingency.
Hope this helps,
This is what I can tell you... there are different types of appraisals - when purchasing a home your lender will send out an appraiser to make sure the value of the property is equal to, or more than, the loan amount. If the property does not appraise then the lender will only loan the amount reported in the appraisal. If your have the Georgia Assoc. of REALTORS, Appraisal Contingency Exhibit as part of your contract, you can negotiate with the Seller to lower the price to the appraised value. Or you could pay the difference between the appraised value and the sales price (in addition to what you already have agreed to pay as a downpayment) and go forth with the purchase. If the Seller will not lower the price to the appraised value, you can get out of the deal with this contingency.
The market value of a home is the amount a Buyer is willing to pay... in a hot market this price keeps increasing and so do the appraisals. In the Buyer's market we currently face, the values may be decreasing slightly. Also appraisers need to factor in foreclosures. Therefore if the property is in a subdivision with foreclosed homes, the value given is lower. This doesn't seem fair, but that is what's happening. The point here is to have the Appraisal Contengincy Exhibit as part of your contract to avoid problems with low appraisals if you are the Buyer.
If the appraisal is more than the purchase and sale agreement, the purchaser has equity in the home at the time of closing.
The appraisal contingency basically says....is the appraised value s less than the purchase and sale agreement price, the purchaser can ask the seller to reduce the sales price ( he is not obligated to do that) or the purchaser can walk away. The contingency sets all the time lines and what has to be done.
The pracitcal matter is purchaser and seller can come to some mutual agreement if the property does not appraiser. Example, the purchaser and seller can agree to split the differenc between the sale price and the appaised value. The house sales for fewer dollars and the purchaser will need to bring more dollars to closing.
Hope this was helpful.