As you shop for a home, or when you’re ready to sell your current home, one big question is always: How much? How much will you sell for or how much will you have to spend to buy your dream home? To complicate matters, there’s the issue of the home appraisal vs. sale price. Why are they sometimes different? And what does it mean when this happens?
How Does Home Appraisal Work?
To understand why the home appraisal value could be different from the final sale price, we first need to look at how pricing works in real estate.
If you think your home should be valued at $500,000, but no one will buy it from you at that price, then it’s not truly “worth” that amount. Regardless of the value of the materials used to build the house, the location, or what you paid for it years prior, the value of the home is found in the agreement between you and a buyer.
Essentially, the true value of a home is found in the balance between what one party is willing to pay and what the owner is willing to sell for.
This is why the real estate market fluctuates so much. Because what people are willing to buy and sell for is constantly changing based on the overall economy, how much money people have, how many homes are for sale, and how many people are currently shopping for homes.
Now that we have Economics 101 out of the way, let’s look at what this means for during the home buying & selling process.
Who Orders an Appraisal and
What Does a Home Appraiser Do?
During a real estate transaction, the appraisal process is done on the buyer’s side and is done through their lending bank. The bank will select a neutral third party to conduct the appraisal.
The home appraiser will have a copy of the offer you’ve made on the home and they’ll visit the home to determine if the home is worth the sales price you were approved for. Essentially they’re checking that what the bank has said they’ll loan on a house is actually what the home is worth.
The appraiser will make this determination based on:
- Size of the home
- Lot size
- Number of bedrooms
- Number of baths
- …and how these elements compare to other comparable homes in the area
It’s not enough to simply look at a home by itself and determine a number. Appraisers are comparing a home to:
- Homes of similar size, condition, and age, that are…
- Within a half mile to a mile of the home being appraised, and that have…
- Recently sold within the last six months.
Appraisers will make adjustments if comparable homes have more or less space, by adding or subtracting some value, if needed.
What The Appraisal Amount Means for a Buyer
The appraisal amount is important to a buyer because the bank will only loan an amount based on an appraiser’s determination of a home’s value.
In other words, if you’re pre-approved for a $500k loan, but the home you’re buying is valued for $400k, you won’t get a loan for an additional $100k simply because you’d been approved for that amount.
On the other hand, if a home is valued at $600k, your bank won’t simply bump up your pre-approved amount. In that case, you’ll need to find a way to bridge the gap (called an appraisal gap) in order to buy the home (more on this further below).
What About Online Estimations to
Determine Home Appraisal vs. Sale Price?
Real estate websites such as Zillow and RedFin show estimated values on homes. But do these numbers mean anything?
In short, not really.
These are computer-generated numbers that might be interesting for a casual understanding of the state of the market.
But it’s not a number your lender will care about.
Since they aren’t based on a human appraiser’s professional assessments and comparison to similar homes, computer-generated numbers won’t be used as an official part of a real estate transaction.
What Happens After an Appraisal?
There are three possible outcomes of a home appraisal:
1. The appraisal comes back “at value”
I.e., You offered $500,000 and the appraisal came to $500,000.
In this case, nothing further needs to be done at this stage of the process. This is the ideal scenario so the sales process can continue moving on. Woohoo!
2. The home appraises under the offer amount.
I.e., You offered $500,000 and the appraisal came to $400,000.
In this case, there are some options:
- The seller can lower the price to match the appraised value.
- This allows the deal to continue, though there could still be negotiations
- The seller can opt not to lower the price, which leaves three options for the buyer:
- The buyer can safely back out of the deal with no money lost on their part.
- The buyer can dispute the appraisal (more on that below).
- Or the buyer can bring extra cash to the deal to make up the difference (see more about appraisal gaps below)
3. The home appraises over the offer amount.
I.e., You offered $500,000 and the appraisal came to $600,000.
In this case, the buyer is getting a good deal on the home! The buyer won’t need to pay the additional amount over what was originally offered.
But will the seller ask for more money anyway? Keep reading…
The Appraisal Gap:
When There’s a Home Appraisal vs. Sale Price Difference
If your home appraisal brought you to option 2 above and the seller won’t drop the price, buyers can pay an additional “appraisal gap” to make up this difference.
Sometimes buyers will include an upfront appraisal gap amount in their original offer. In other words, buyers will say “We’ll offer $X for this home, but we’re willing to offer an additional $Y if there is an appraisal gap.”
Including an appraisal gap amount in an offer can ensure that the deal continue to move forward without further delays or negotiations even if there’s a difference between the numbers.
When There’s a Home Appraisal vs. Sale Price Difference, Can I Dispute It?
Yes! In the case of a dispute, you can submit a list of comparable homes that you have found that differ from what the appraiser has determined.
While there’s no guarantee that an appraiser will adjust their appraised value, some will consider it if given evidence of a major price discrepancy.
While you can certainly find an appraiser of your own to conduct an appraisal, the lending bank will only go with the recommendation of the appraiser they assigned.
Will a Seller Ask for More Money if the
Appraisal is Higher Than My Offer?
If a home is appraised for higher than an offer amount, the seller can’t ask for more money. This is because the contract has already been written up and signed by both parties agreeing to a certain amount.
However, if a deal fell through for other reasons, the seller would then be free to put it back on the market for a higher amount, now knowing that the home has appraised for higher.