The Appraisal is a Vital Part of the Lending Process

What is a real estate appraisal?
It is an expert, unbiased opinion of the market value of real property.  The appraiser performs a detailed site inspection which includes visiting the property, recording room measurements and noting amenity information.  Since no two properties are identical, an appraiser considers the property location, comparable sales in the area, floor plan sketches and local building costs and labor rates.

Why get an appraisal?
If you’re financing your property purchase, the lender requires it.  The lender wants to ensure the property is worth what a buyer has agreed to pay for it since the lender, more often than not, is putting in three or four times as much cash as the buyer at the time of purchase.  The lender wants to take prudent risks.

What if the appraisal value is less than the purchase contract price?
This occurs more than it used to and can derail the buyer’s home purchase.  The lender will finance less than the buyer expected which means the buyer, if he/she still wants the property, needs to put in more cash than originally expected to complete the purchase.

A real life example:
A buyer agreed to purchase a Honolulu condominium for $500,000.  Let’s say the lender will finance up to 80% of the purchase.  That means the buyer will provide a $100,000 down payment and finance the remaining $400,000.  What if the appraised value is only $480,000?  The lender will finance 80%, or $384,000.  That means the buyer needs to contribute $116,000 as the down payment instead of $100,000.  Some buyers can manage this; others cannot.