The Appraisal Hurdle

First of all, we should spell it out: an appraisal is a process in which the value of a home is established.

And here's how it works: If you find a house you want to buy, make an offer, and it's accepted? Then you have what's called a ratified contract.

Basically, you and the seller have agreed on a sales price, on a settlement date, and on many other conditions. But again, you both agree to all the terms.

The next step? The REALTOR® will get a copy of that signed contract to your lender. And the lender will order the appraisal. Basically, they want to make sure that the house they're lending money on is worth it! Sounds fair, right?

Now, in normal real estate markets, coming up with the home's value is a pretty straightforward process.

To do it, the appraiser would look at the home you want to buy, and compare it to other sales of similar homes in the neighborhood. They'd consider what has sold, and for how much, and also what's on the market, but has failed to sell.

Typically, the appraiser would visit the house and take a tour. They'd carefully examine the house in terms of size, and condition, and upgrades...that sort of thing.

And based on all those factors, the appraiser will determine the home's value, and report back to the lender, and tell them whether the house is worth the selling price, or not.

That's in a normal market. But as we all know, today's market is anything but normal.

For many months now, home prices in many parts of the country have been falling. And some lenders want to know not only what the house is worth -- they sometimes want to know what it's going to be worth, in six months, or a year. And if an appraiser tries to project into the future like that, sometimes it can kill the deal, because the appraisal comes in much lower than the sales price.

Another problem: distressed properties.

If one house on a street is in great condition, and is for sale at one price, but many other homes in the neighborhood are short sales or foreclosures, and are for sale at say, 30% less...what does that do to the appraised value of the first house? Will an appraiser say it's worth 30% less? Or will he say, hey, it's not a distress sale, so it should go for more money?

Tough call!

So all these are issues that might affect you, if you put a contract on a house.

Now obviously, if you're buying, you want to get the place for the best price possible. But if the appraisal comes in too low, you won't get the mortgage, and might not get the place at all.

So here's what to expect:

If the appraised price comes in lower than the sales price, the first step belongs to the seller. They might be asked to lower the sales price, to match the appraisal. And they might just do it. Which means that you might just get the place for less money.

But they might not do it. And now, you might be asked to come up with the difference!

If you have a lot of cash, and you're willing? That's your decision. This is a good time to consult with a REALTOR® to get their advice.

But if your appraisal comes in low, and you want to walk away? In many cases, an appraisal clause in the contract, or your financing clause, might give you the right to cancel the contract. Again...talk to a REALTOR®.

You never want to pay too much for a property... and the appraisal can help protect you from being overcharged at the settlement table.

But if you truly believe the appraisal is wrong, talk to your lender. Tell them your concerns. They might be willing to do a second appraisal, and keep the deal on track.