Well first things first. What’s an appraisal? An appraisal is done by an independent third-party that the lender hires to give a value of the property that you are purchasing. An appraiser will take a look at the recent sales in the neighborhood, the condition of the general market etc. and then determine a value based on those factors.
If you want to buy a house for $1 million but all the other homes in the neighborhood are selling for $900,000, there’s good chance the appraiser may only think it’s worth $900,000.
So what do you do if that happens? Well if you are the buyer, you have a few options. One, you can negotiate with the seller to lower the purchase price. Two, cancel the agreement or three, come up with the extra cash to make up the difference between the appraised value and the purchase price.
Number three is where people get a little confused. You see the lender is only going to give you normally 20% of the appraised value. Not the purchase price. The lender doesn’t really care what you want to buy it for, they only care about what it’s actually worth according to the appraisal. So if it appraises lower than the purchase price someone’s going to make up the difference. And it’s usually the buyer when it’s a sellers market. If you go back to the seller and say I want it now by your house for only $900,000 they’re going to tell you to pound sand and then go to the next buyer who has the cash to make up the difference.