Hi there! I am an LA-based Realtor who has been spending the last few weeks going over all the questions I hear about the home buying process. Welcome to week eight of my ten step tutorial designed to help anyone feel like an expert when purchasing a property. So far I’ve broken down concepts like opening escrow, making an offer, and why pre-approval letters might just be one of the most important steps when buying a home.
Last week we dived into the first of three contingencies: the inspection. Which means that today I’ll be going over The Appraisal Contingency. An appraisal is the act of assessing an item’s value. The appraisal is an important and specific part of the home buying process because you’ll need an appraisal to be completed in order to comply with your loan.
The good news is, since the appraisal and your loan are two entities that rely on each other, when escrow is opened your mortgage broker or lender will order the appraisal. This is done to ensure that the amount of money being loaned to you matches the value of the property. Within the first week or two of escrow, the appraiser will come to the property to confirm that the properties price reflects the home’s market value. For legal reasons, the appraiser will be chosen at random to come and appraise the property. If you are more of a visual learner, I’ve included a video below.
How does the Appraiser determine a home’s value?
This is a question I hear often, and I’m happy to break it down. The appraiser will come to the property and compare it to any other similar properties that have sold in the area. She or he will then write a report comparing the property to comparable properties (or comps) and submit this report. The report, which includes an overall evaluation of the property as well as the comps, will be sent to your lender. The amount the property appraises for will be considered the maximum amount of money that your lender will approve for you to borrow in order to purchase this property.
If the valuation is lower than your purchase price you can renegotiate the price with the seller. If the valuation is at the same price, you’re good to go! Nothing needs to be done and your lender can move forward with your loan. If you have an all cash offer, you will not have to order an appraiser and will not have an appraisal contingency because you do not have a loan.
Once you have renegotiated or agreed on the appraisal amount, you can release your appraisal contingency.
Now, I mentioned above that there are three contingencies in place while navigating through the escrow period. The inspection contingency, the appraisal contingency, and finally The Loan Contingency. (Remember, if you have an all cash offer then the appraisal and loan contingency won’t be relevant.)
With the appraisal finished, and report sent in, you will now have the loan contingency next to release before your deposit goes hard. But I don’t want to overwhelm you with too much information, so I’ll save all the juicy details about loan contingencies for next week.
One quick question before you go, is this tutorial helping you? I’ve designed this guide to empower buyers, especially if it’s your first-time, as you navigate purchasing a property. As an added bonus, I’ve designed this learning experience to be interactive. Do you have a question? Is there something I could be clearer about? If so, don’t be shy! I want each home-buyer get the most out of this series, which is why I’m prioritizing any questions I receive from curious new friends like you.
You can also find additional tips, and insights on my Instagram, where I share all the most recent updates on anything and everything real estate.
Looking forward to seeing you again next week!
-Lauren “Glasses” Biedenharn