Around 86 percent of homeowners obtain a mortgage to purchase their new home, so why are Sellers bummed to see an appraisal contingency in a contract?
For Sellers it may be the fear of knowing that there is one more “thing” that allows the Buyer to terminate the contract, it may be the idea that a stranger is coming to your home and judging it, or it may be that the listing agent has not provided solace and value to the Sellers in explaining how appraisals work and why this contingency is as routine as a root canal, but far less painful.
Let’s begin with the lender who will order the appraisal, they are providing a large sum of money to the borrower and they want to be certain that the property in question is not worth less than the amount they are loaning. If the value of a property does not reflect the agreed to price in the contract the lender will require funds to make up the difference. The Buyer can come to the closing table with more funds to cover the disparity, the Seller can lower the contracted price to reflect the appraised value, or the Buyer and Seller can meet in the middle to appease the lender.
How does an appraiser value a home? There are many steps to this process, and I would like to highlight three, condition rating, quality rating and comparable home sales.
The condition rating has a range of C1-C6, C1 being a new build that has not been occupied and C6 is an uninhabitable structure that requires a large amount of work or large machinery to remove it. It is important to note that a clean home will likely have a better condition rating so take the time to fix, paint and make the home sparkle before the appraiser arrives.
The quality rating, which has a range of Q1-Q6, takes into account many items which include the architecture of the home, if the home was constructed by skilled trades people as well as the quality of the mechanicals and fixtures in the home. Ultra-high end custom finish will take the Q1 rating while a home with no mechanicals that was built without blueprints by a guy named Frank will take the Q6 rating.
Yes, I have seen two homes with a Q6 rating, one was stripped of every piece of value, including the copper wiring from the walls. Click here for more information on each rating.
Livable square footage, lot size and style are the staples when it comes to comparing homes in an apples-to-apples type of way. If you are selling a 2,000 square foot, ranch-style home on a quarter acre, the appraiser will search for home sales in the last six months that meet this criteria. Once a baseline value is made then the adjustments concerning quality and condition come in to play.
In an effort to build rapport and understanding with an appraiser a real estate broker, me, will furnish the appraiser with a comparative market analysis showing the homes that fit the mold as well as communicate why the home is worth the agreed to price in the contract.
Problems arise with the appraisal contingency 10-20% of the time, which is not a terrible number, but one to remember as this can happen and is more likely to happen if your home is not priced correctly at the beginning of the process and if the home has not been fluffed and buffed before heading to market.
Recognizing what type of real estate market your area is in, realizing your home is priced right for said market and making the appropriate fixes to your home to achieve the highest and best value will allow you to not loose sleep when the words appraisal contingency are read in the contract.