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What Appraisals Mean to Both Buyers and Sellers

What do appraisals mean to you as a buyer and a seller? I get this question all the time.

An appraisal is something that’s paid for by the buyer but enacted by the bank as protection for them to make sure that the home is worth what you’re being offered for it. In other words, if you have a house on the market for $500,000 and you take an offer for $600,000, the bank wants to ensure – to protect the loan that it’s extending the buyer – that they can resell the house for that $600,000 price tag. If it isn’t, or they can’t resell it for that amount, they’re not going to lend the $600,000.

The appraisal is basically a protection for the bank and protection for their loan. This is why a cash buyer is so much more attractive to you as a seller, because then you don’t have to go through the whole process. They don’t have to worry about what the home’s “worth” to the bank. They don’t care – it’s cash. However, most of your offers are not going to be cash. Most will be financed through a bank.

“The true value of an offer can change based on how an appraisal unfolds.”

So, here’s the scenario: you put your house on the market for $500,000, and you get two offers: one for $550,000, and one for $575,000. Which one is the better offer?

It’s a trick question. You don’t know. It would sound like $575,000 is better than $550,000, but maybe not! If the $550,000 offer stated in its contract that it was going to waive the appraisal, then they said, in essence, “I don’t care what this house appraises at, I’m giving you $550,000.” And the $575,000 offer didn’t have that language – the standard language – which in a Washington State contract says if it doesn’t meet appraisal the buyer is no longer obligated your house; then that $575,000 offer – if it’s not protected – can get out of the deal if there’s a low appraisal.

Suppose your bank comes out and says, “You know what? Your house is only worth $525,000 to us.” Ruh-roh! Now the $575,000 offer can actually walk or request that you lower the price if you don’t want to put it back on the market. If you did go back on the market, you’d go back knowing that the appraised value is only $525,000.

However, the $550,000 offer said they were waiving an appraisal, so it didn’t matter to you there what it was going to appraise at. It didn’t matter to them, either. So now the house appraises at $525,000 but the $550,000 people are now saying they’re going to take $25,000 out of their pocket and give it to you and only get their loan for the $525,000. How much the house appraises for you at that point is immaterial. It can appraise for anything, and you don’t really care because you’re getting your $550,000 for it.

It’s really critical you understand how that works. If you’re a buyer and you don’t have a lot of extra cash and you don’t have that $25,000, it makes it that much harder for you because if you offered for $550,000 and couldn’t make up for any of the low appraisal, anybody else in that roster of people who also offered for the house and could make up some of that appraisal on the house is going to look better than your offer looks. It doesn’t matter how much over the asking price it is. At a certain point it, why not offer a million? If you’re not going to make up the appraised value, why not just offer a million dollars? The seller won’t take it because someone is going to make up the appraised value in that stack of multiple offers. In a slower market, it doesn’t come up, but in a hot market like today it comes up all the time.

That’s how appraisals impact what offer you accept, or don’t, or what offers get accepted and don’t get accepted. I know this is fairly complicated and I went through it rather quickly, but watch the video again and if you have any questions, it’s no problem. Just call me. I’d be happy to go over this with you; facebook me, text me, email me, whatever. I’d be happy to go over the details with you.

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