Appraisal

The lender needs to know that the property you’re buying is worth what everyone says it is. An appraisal accomplishes that. Here’s how it works.

An appraiser, who is licensed by the state, will make an appointment to visit the property. He will inspect public records about the property, measure its dimensions and take photos. He will also identify any significant defects related to health and safety. The appraiser is primarily looking for things like exposed wiring, badly peeling paint and any obvious structural problems. The VA wants to be sure that you get a home not only with very good financing, but one that is sound. You should not rely only on the appraiser’s report, though; you should get a home inspection as well to determine whether there are any problems with the property that aren’t immediately obvious. This second report is for your benefit only; the lender won’t see it.

After the appraiser has taken measurements and photos, he will use that information to describe the property in a standardized way: living space, room count, amenities, lot size, etc. Then he will find at least three similar, comparable properties (”comps”) that have sold within six months. He will describe these properties in the same way. Then he will make dollar adjustments to each of the comps to compensate for differences in living area, room count, conditions and amenities. He does this to make them the equivalent of the property you are buying. He calculates the estimated value of your home using all this information.

In most cases, the appraiser’s opinion of value will be the same as the price you have agreed to pay. If he determines that the property is worth less than you have agreed to pay, you have some choices.

First, you can walk away from the deal. You will get your deposit back (although you will still have to pay for the appraisal—about $475).

You could negotiate a lower price with the seller. If you have agreed to pay $300,000 but the appraiser says the property is worth $290,000, you can ask the seller to drop his price to the lower figure. They are not obligated to do so, but they are generally aware that a low appraisal can indicate that their asking price was too high in the first place.

In some cases, you may negotiate a price with the seller that is somewhere between the originally agreed price and the appraised value. Your loan amount will be based on the lower of the appraised value or the purchase price, so this means that you would have to come up with some additional cash to make up the difference between the appraisal and the agreed price.

The appraiser’s report protects you, as well as the lender. If you make an offer to buy the property that happens to be more than it is really worth, the appraisal can alert you to that fact. Then you can decide whether to proceed, renegotiate with the seller, or walk away.