An appraisal is an unbiased estimate of the true (or fair market) value of a home by a licensed appraiser. All lenders order an appraisal to ensure that the amount of money requested by the borrower is appropriate. Appraisals include recent sales information for similar properties (comps), the current condition of the property, and the location of the property to determine the property’s value. If the appraisal comes back HIGHER than the contract price, the buyer is effectively buying the home for less than it’s true value. If the appraisal comes back LOWER than the contract price, the bank will only lend the borrower up to the appraised value.
For example, if you are under contract on a property for $300,000 and the appraisal determines the value to be $290,000, the $10,000 difference will need to be made up somehow. This can be addressed in one of three ways: (1) the seller can agree to lower the contract price to the appraised value- this is unlikely in our current market, (2) the buyer can bring the additional $10,000 to the closing table to make up the difference, or (3) the buyer and seller can agree to meet in the middle – the sellers can lower the contract price $5,000 and the buyer can bring $5,000 extra to the closing table. Appraisals can be challenged if provided enough evidence to justify the contract price and sway the appraiser’s evaluation, but often, the appraiser stands by their original assessment.