How does the appraisal process affect buyers and sellers?

A: In a purchase transaction where the buyer is using bank financing, the lender will require an appraisal to be completed. A satisfactory appraisal is one of the conditions of final loan approval by the lender. When the appraisal value is at or greater than the contracted purchase price, the appraisal condition is satisfied.

When the appraisal value comes in below the contracted purchase price, it can create problems. With a traditional loan consisting of 20 percent down to 80 percent loan, the lender will only lend up to 80 percent of the purchase price.

For example, a contracted purchase price of $ 1 million implies a loan of $ 800,000. If the appraisal shows a value of $900,000 the bank will only lend 80 percent of that figure ($ 720,000). There is a shortfall of $ 80,000.

This shortfall can be addressed through the buyer contributing more cash, or through a renegotiated sales price with the seller. In our current inventory-starved market, renegotiating the purchase price with the seller will be very difficult.

Higher down payments can enable buyers to avoid appraisal problems. Many buyers have used high down payments and indeed 100 percent cash to avoid appraisal problems.

Susan Coleman, Coldwell Banker, Greenbrae,

(415) 925 3264, scoleman@cbnorcal.com A: The point of an appraisal is sometimes just to reassure buyers that they are not paying too much for their new home.

More often, it’s a requirement of the lender, who wants an independent assessment of the property to make sure the collateral on the loan is sufficient, and the buyer’s down payment is some minimum percentage of the appraised value.

If the appraised value is at least as high as the sale price, the lender is happy, the buyer is happy, and the purchase can go forward.

Things get more complicated if the appraiser says the value is less than the sale price.

What happens in that case depends on whether there is an appraisal contingency in the contract. With an appraisal contingency, the buyers can attempt to renegotiate the sale price down to, or closer to, the appraised value. If they’re successful, the buyers continue with the purchase, and if not, they have the option to cancel the sale.

If there is no appraisal contingency, buyers don’t have the right to cancel based on the appraisal.

If they’re not paying all cash, they may need to increase the amount of their down payment to qualify for the same loan, or they may need to switch to a loan program that allows a lower down payment percentage.

Marilyn Garcia, Coldwell Banker, Berkeley,

(510) 390-5406, marilyn_garcia@sbcglobal.net A: Appraisals can make or break deals in today’s market because square footage has become one of the most important metrics for determining home values for buyers.

My team has been involved in transactions where three independent appraisers came up with a variance of 600 square feet on the same house that was around 2,500 square feet. How is that possible?

It was a major barrier to completing the sale, as the buyer wanted to use the low number and the seller wanted to use the high number.

An agent that is not a pro would have lost that deal.

It is just as important in large transactions as well.

Recently, a $ 15 million deal with a client almost fell apart over a difference of only 300 square feet.

Appraisals are imperative to the transaction process.

It is important that they accurately capture every area on a property that may have been previously overlooked. Camilla Moshayedi, Team TeedHaze, (949) 338-1805, camilla.moshayedi@sothebyshomes.com