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The Appraisal - Deal Maker or Deal Breaker

Thursday, September 29, 2011   /   by Ira Miskin

The Appraisal - Deal Maker or Deal Breaker

An appraisal is a critically important building block in the purchase and sale of a property. It is important for the Buyer who does not want to overpay for their new home; important for the Seller because nearly all transactions are contingent upon a home appraising at or above the agreed-upon sale price; important for the Buyer's lender in order to verify the property they are providing a mortgage for meets or exceeds the amount of the loan value they will be funding.

In Metro Atlanta, the market is large, spread out and varied. In some Market Areas home values generally have plummeted more than 30%. Yet in pockets in those same Areas home values have declined significantly less. Individual sub division communities in some Areas hold valuations despite the market crash; other sub division communities riven by short sales and foreclosures in the same Areas have declined at a rate greater than the Market Area. Realtors and their Team including research experts have to be clearly in touch with the many variations in home values from community to community, school district to school district and Area to Area. That keen awareness and thorough research and price analysis can help significantly when pricing a home for sale or when making an offer to purchase a property.

When making or accepting an offer, Buyers and Sellers need to heed their Realtor's market analysis so they have a clear picture of their home's fair market value. Offering or accepting a price that may not be consistent with recent appraisals could foster difficulties in late stage price negotiations and may lead to termination of the transaction.

One of the documents that manage the wrinkle of when a home appraises for less than the agreed upon sale price is an exhibit called the Appraisal Contingency. This Contingency provides for a specific amount of time for the Buyer, if it is an all cash transaction, or the Buyer's lender if the Buyer is seeking loan financing, to order and complete the property appraisal. This is the nail-biting period. Everyone hopes the appraisal value of the property is consistent with the sale price. But what if the property appraises at an amount less than the sale price?

In this same document there is a provision allowing the Buyer to ask the Seller to lower the sale price to the appraised value. If the Seller agrees, the Buyer is obligated to complete the purchase. If the Seller refuses, the Buyer can terminate the Agreement and have the earnest money deposit refunded. Of course, any of the costs for inspections and any other due diligence work will be lost by the Buyer. There are a number of ways to remedy appraisal-price discrepancies, but for the most part, if Buyer and Seller cannot reach a re-negotiated agreement on price, the deal is dead. The use of such contingencies is important. They protect the rights of Buyers and Sellers; they set definite time frames for completing critical tasks and proscribe specific mechanisms for resolving differences.

But in the end, when a sale fails to complete because of an appraisal, everyone is disappointed. The appraisal is necessary to protect all parties' interests, but when Buyers and Sellers agree on prices that are inconsistent with researched market valuations, there is always the chance the appraisal will not be the deal maker confirming the value of the property, but a deal breaker, confirming all parties involved miscalculated the property's true market worth. Are there times when an appraiser will get it wrong? Certainly. But unless an appraisal is grossly out of step with researched market values, the appraisal rules. Thorough market research and a clear understanding of a property's market value make the appraisal a validation of price and not the arbiter of price. It makes the appraisal a deal maker not a deal breaker.

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