WHAT IS AN APPRAISAL?
An appraisal is the estimation of a home's current market value. A licensed appraiser contracted by the lender completes this estimation, which is calculated by comparing recent nearby sold homes to the property that is being appraised.
WHAT IS IT FOR?
Appraisals are required by mortgage lenders to be sure that the money they are lending to a buyer is a fair amount for the home. The lenders want to be sure that the buyers are not overpaying for the property. This is to protect the lender. If the buyer stops making payments on the home, the lender wants to make sure they would be able to sell and re-coup the money that they loaned for the home.
HOW DOES IT WORK?
If you are financing the sale with a mortgage, the lender will require an appraisal to be done on the home. The lender hires a 3rd party appraisal company, who will send an appraiser to your home. They will evaluate your home, look at comparable sales, then send the lender a full appraisal report, which includes the "appraised value" of your home. The buyers typically pay for the appraisal directly to the bank and before the appraisel is scheduled.
TIMING
Appraisals can take a few minutes to a few hours to complete, depending on the details of the home and the appraiser's methods. It usually takes a week to 10 days to complete and send the appraisal report to the lender (or whomever ordered it).
WHAT HAPPENS IF THE APPRAISAL COMES IN LOW?
If the appraised value comes in and it's BELOW the agreed upon purchase price, a few things could happen:
OPTION 1:
Either party, buyer or seller, could choose to terminate the contract (unless a different agreement was made in writing upfront, as part of the offer).
OPTION 2:
Both parties re-negotiate the purchase price. The seller could agree to sell for the lower appraised value, the buyer (if able and willing) could come up with the difference in cash and move forward at the original agreed price, or a different price, somewhere in-between, could be negotiated.
OPTION 3:
After reviewing the appraisal report, if you believe the appraiser to be wrong (maybe you disagree with the comps they used), you could go through an appeal process. But this doesn't guarantee that the appraiser will change the value. In this case, see if the lender will allow a second appraisal. Both parties will have to agree to this, and decide who is paying for the second appraisal.
The reason these are your options, is because the lender will only loan money for (up to) the appraised value. They can't simply add the discrepancy into the mortgage. With an Appraisel Contingency, You, as the buyer, would have to have the extra cash.
