So you’ve got your offer accepted, made it through the inspection period, and hear from your agent that the final hurdle is the appraisal. What exactly does that mean?
The basic premise of the appraisal is for a third party, the appraiser, to value the home based on location, home features and recent comparable sales. They will perform an inspection of the home to judge condition and make sure there are no major flaws, such as a roof past its life span or extensive dry rot. Their major tool in coming to a good valuation is looking at homes that have very recently sold in a tight radius to the subject property. They try to use homes that are very similar to the subject property in things like size, number of bedrooms, year built, etc, as well as very close to the home, and that have sold very recently. They may need to make minor adjustments to make sure they are really comparing apples to apples.
The reason for the appraisal is to make sure that the buyer is not-overpaying for the property. In a hot market such as what we have in Portland, bidding wars often drive up the price of the home to values that are “too high” for the area and specs of the home. Just because multiple offers show that buyers are willing to pay that price, it does not mean that the house will appraise for that value if there aren’t any comparables to justify the higher point.
This may seem counter-intuitive, but just remember that the lender requires the appraisal because they are technically buying the property and want to make sure that it is a solid investment. They take out any emotional connection to the house, because if you do over-pay and can’t keep up with payments, they are the ones who would have to take possession of the house and try to re-sell it.
For the most part, both the buyer’s agent and the listing agent will make sure that the buyer does not put in an offer well above a realistic price, and that the seller does not accept an offer that will not be met in an appraisal (unless it is a cash offer, in which case an appraisal is not required). This means that most homes in the Portland metro area are appraising at value. However, if the home does appraise below the agreed upon sales price the buyer and seller must come to an agreement about how to make up the discrepancy. Either the buyer has to bring the difference to the transaction, the seller has to agree to lower the sales price, or the buyer and seller can meet somewhere in the middle.