What’s So Important About Home Appraisals?

Houston Real Estate Podcast with Mike Gray

If you’re buying a home and getting a loan, appraisals are something you need to know about

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Today I want to go over the subject of home appraisals and what you need to know about them. First though, I want to thank you for helping our team get recognized as one of the top-20 luxury teams in Houston in 2016. Whether you’ve done business with us or referred us, we can’t thank you enough for your continued support, and we truly appreciate it. Now, how does a home appraisal happen? If you purchase a home and you get a loan, your lender will require that an appraisal is done before your loan is approved. Although the true definition of a home sale transaction is a price that a willing buyer and seller agree on, the lender will require a third party to visit the property and give it a fair market value. Typically, the lender will loan a percentage amount that’s agreed in the contract. If you’re putting 20% down on the loan, the bank will lend you the other 80% of what’s in the contract as long as the home appraises for the contract amount. The problem occurs when the home doesn’t appraise for the contract amount. When that happens, the bank will still loan the 80%, but only for the appraised amount—not the contract price.

If a home doesn't appraise for the contract price, many different things can happen.

Let’s say you’re purchasing a home for $1 million, you’re putting down $200,000, and the bank is loaning you $800,000. What happens if a $900,000 appraisal happens and results in a $100,000 difference? At that point, negotiations happen all over again, and there are four different options in which all parties can continue:

1. The buyer can bring in an additional $100,000 to the closing table.
2. The seller can reduce the price by another $100,000 to meet the lender’s needs.
3. The buyer and seller can find some common ground and make up the difference. This is typically the most common.
4. The buyer can walk away.

Is a home not appraising a common occurrence? Yes and no. A few years ago after the financial crisis, lenders were extremely cautious, so homes not appraising was a common occurrence. Fortunately, we don’t see that as much now. One thing our team does is meet the appraiser and bring documentation to justify the purchase price. We’ve found this to be a very beneficial thing to do and something that is welcomed by appraisers. As you know, there are many intricacies within this city when it comes to real estate, so this gives them additional information. If you’re buying a home and getting a loan, make sure that you bring all the information you can to get the appraiser to justify the home’s value.
If you have any questions about this topic or are thinking about buying or selling a home, feel free to give me a call or shoot me an email. I’d be glad to help you.