Happy Tuesday!
Let's talk appraisals. So, when you are buying a home and getting a loan, the lender will hire an appraiser as their "eyes and ears". They will go to the property and visually inspect the condition of the home. They want to make sure there is not major damage or danger to the home and that it is a safe investment for the lender. They check for issues like water stains, which may signify a leak in the roof, big cracks in the foundation, dangerous rotted decking that poses a hazard to walk on...things like that. They also look to make sure the building is up to local, government codes. For example, a water heater must be anchored, braced, and strapped to prevent tipping over and burning someone. Also, there are specific areas in a home that need to have smoke detectors installed.
It is important to mention that every appraiser is different. We have experienced some appraisals where nothing was noted wrong with the house and some that have pointed out every little thing wrong. An appraisal IS NOT a substitution for a HOME INSPECTION! Don't think otherwise. You want an appraisal to go smooth and find no issues with the home.
What you may already know about the appraiser is that they also give a professional opinion of the value of the home. We do like to ephasize OPINION. This means, you can send 4 different appraisers to the same exact home and their values may not all be the same. They determine the value by looking at other local, similar homes (also called comps or comparables) that have sold within the same amount of time.
If the property appraises at value, CONGRATS! You're that much closer to buying your dream home and can add this peice to the puzzle. If it does not appraise, a buyer has 3 options-
-They can cancel and receive their deposit back (if it is within their Appraisal Contingency which is pre-written as 17 days on the California Residential Purchase Contract)
-They can request the seller to reduce the price to the appraised value
-Or they can pay the difference (If you're in contract for $550,000 and it appraises for $525,000, then $25,000 would have to be paid out of pocket)
If the property appraises at OVER the agreed purchase price, HURRAY, you will have some equity in the home already! Or, you can request the seller to INCREASE the purchase price and get a CREDIT back in escrow to use towards your closing costs. Closing costs are the upfront fees that have to be paid when closing on your purchase (more on that later). An example of this would be-
Agreed purchase price- $600,000
Appraised value- $605,000
Request to increase to purchase price to $605,000 and get a $5,000 credit in escrow. Lender credit limits do apply and this varies on a case by case basis. Also, the seller has to agree to the change in terms. But, to summarize, you are financing your closing costs so you can pay less upfront!
Whew! I know that was a lot of information. Hopefully you can take something away. Don't forget, we are always here to answer your questions! Thanks for tuning in and we will see you next Tuesday!