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You may be wondering “What is an appraisal anyway and when does it occur?”

If you are, you aren’t alone.  We get asked this question all the time after we’ve made an offer on a house, had the inspection done and made it through all of our title dates and deadlines.  The rest of the process including the appraisal, underwriting and title are a bit fuzzy to most people.  In addition, you might be wondering:

  1. Does the buyer or the seller pay for the appraisal?
  2. Who hires the appraiser?
  3. Who performs the appraisal?
  4. Who pays for the appraiser?
  5. How much does an appraisal cost?
  6. What happens if the appraisal comes in lower than the purchase price of the home?

These are all great questions! Take a look at the answers below:

  1. While this is negotiable in our Colorado Contract to Buy and Sell Real Estate, it’s really a Buyer’s expense. The fee for this will paid by the Buyer, to the Buyer’s Lender directly.
  2. The appraiser is hired by the Buyer’s Lender through an AMC. AMC stands for Appraisal Management Company. These are business entities that administer networks of independent appraisers to fulfill real estate appraisal assignments on behalf of lenders. This is to prevent biases and/ or persuasion through the process.
  3. An independent, licensed appraiser (hired by an AMC as mentioned above) will perform the appraisal.
  4. The appraiser is paid from the funds the Buyer pays to their lender for the appraisal.
  5. Most appraisers cost between $650-$1,000. However, if timelines are tight and a rush service is necessary, a rush fee may be applied as well.
  6. In short, if the appraisal comes in low and the Buyer objects by the date set forth in the Contract, three things can happen:
    • The Seller can reduce the price to appraised value and we move forward.
    • The Buyer or the Seller can decide to terminate the contract and earnest money will be refunded to the Buyer if a Resolution can’t be reached by the deadline.
    • Finally, the Buyer can choose to bring the difference between the purchase price and the appraised value to closing in cash and continue on with the sale.

So what do you do if you’re the buyer paying $800,000  for a home, but the appraisal only comes in at $750,000? Uh oh. You’ve got a problem and this article does a great job of explaining what your options are in that situation in more detail.

But what happens if you’re the buyer paying $800,000 for a home and the appraisal value comes in right at the purchase amount price?  Is this a good or bad thing? This is definitely a good thing as it means the bank will give you a loan for the full amount of the purchase price less your down payment.

But what happens when an appraisal comes in high (where the appraisal amount is over the purchase price) and does this happen very often? No, it’s very rare for an appraisal to come in over the purchase price as the bank just needs to know that the property is worth the purchase price so they feel comfortable giving you a loan.  Therefore, it’s not common for an appraisal to come in over purchase price.  When it does, buyers are often very happy as, essentially, you now have instant equity as we got you a great deal!  Occasionally though if your home comes in significantly over the purchase price (say $50K or $100K over the purchase price) it can cause problems. In this scenario where a home comes in significantly over the purchase price, sometimes the underwriter will wonder if there was something shady going on which allowed you to get such a great deal. While this isn’t likely, if it comes up, we’ll work closely with your lender to work through this.  

So, as the buyer, all in all it’s best when the purchase price comes in at or close to the purchase price.

Questions? We’re here to help! Kevin Capra – The Capney Collection – Powered by Compass – 303.809.5515 or email us at Kevin.Capra@Compass.com

Your Colorado Real Estate Expert