Question on appraisal contengency - as I understand the market value of a home will be higher than fair value

Asked by Shakti, Alpharetta, GA Fri Apr 18, 2008

appriased. So ho will this appraisal contingency work ?

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Dave Gordon, , Dahlonega, GA
Fri Apr 18, 2008

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.
3 votes
Lorie Gould, Agent, Duluth, GA
Sat Apr 26, 2008
Shakti, I would say the opposite is true in todays market. Appraisals are coming in higher than what a home will sell for in todays market. This is not a 100% rule but I am noticing it more and more. And county assessments are starting to come in higher also. Because the market is so competitive homes are having to be priced below market or at the bottom of the market to beat the competition.

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.
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1 vote
Natascha Katz, Agent, Alpharetta, GA
Sun Apr 20, 2008
P.S. Be sure your agent uses the exact wording recommended by the GAR in the new Special Stipulation section. Tell your agent it is listed on the 1st forms section of FMLS.
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1 vote
Jolie Abreu, Agent, Boca Raton, FL
Fri Apr 18, 2008
That is not necessarily true. For the most part, the home should appraise at or above the purchase price of a home. Typically, the appraiser working for a lender will appraise the home exactly for the sales price. However, in today's unstable market, many homes have been appraising for lower than the sales price. In this case, the appraisal contingency protects the buyer from being obligated to pay an amount over the appraised value. If you are financing, the lender will not approve the loan unless you , the buyer, brings the cash difference to the table.

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,
Jolie Abreu
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1 vote
Louise Linds…, Agent, Alpharetta, GA
Fri Apr 18, 2008
Your question is about an appraisal contengency... without seeing the exact wording of the contengency, I can't give you an accurate answer.
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.
1 vote
Kathy Seger &…, Agent, Roswell, GA
Fri Apr 18, 2008
Shakti, This is the way I would explain this to someone I was working with....the lender appraises the house to verify the value for a loan. If the appraised value is the price a purchaser and seller agreed to that is what the lender is looking for.

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 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.
1 vote
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