While many of our transactions in Miami are cash (almost half of them!), it’s very common that buyers get a mortgage. When a buyer is getting a mortgage, the buyer’s bank does an appraisal to get an unbiased third-party opinion of value, and to make sure that the bank is only lending on that value.
It’s important to know that banks will only lend money to the buyer based on the appraised value of the home, NOT the contracted price. So if an appraisal comes in and the appraised value is less than the contract price, either the buyer has to come up with the money to make up the difference, OR the price is reduced to reflect the appraised price, or something between appraised price and contract price.
Because so many buyers are getting mortgages, it’s critical when pricing a house to take into account what it might appraise for. There’s nothing worse than going under contract and finding out down the road that it didn’t appraise. Using real comparables from the neighborhood to determine a price and not overpricing is the best way to avoid the appraisal rigmarole.
In my experience, preparing for an appraisal is extremely important. The listing agent is usually the one who attends the appraisal inspection and meets the appraiser. The more prepared they are, the better. I have my sellers put together a list of all upgrades they’ve done to the house in the past few years, and if they’ve done major work, I find it helps to list prices for what they spent to justify the value. It’s also critical to bring the comparables with you that best support the price. The appraiser doesn’t always use the comps I provide, but I do always suggest that they are used. And if the location is especially impactful on the price, it doesn’t hurt to provide the appraiser with a map showing what boundaries he/she should (or shouldn’t) use for his/her comps.
The only way around an appraisal is to find a “cash buyer” who is willing to make an offer not contingent on financing. Cash offers almost always trump financed offers, and this is exactly why! Getting through appraisals and loan approvals can be tough, and that whole step is skipped with a cash buyer.
Bottom line – if you’re making an offer contingent on financing, do your homework. Know the comps in the area. Know what sets this house apart from the others. And be prepared for the appraisal so you don’t have a surprise that could destroy the deal.