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What you need to know about appraisals

Austin is in the midst of a record-shattering seller’s market, where homes are selling for tens of thousands above list price. But whenever prices rise so fast, so quick it can lead to lender-required appraisals coming in way below the contract price, which can destroy a hard-fought deal. 

Concern over low appraisals is the No. 1 source of stress among my buyers and sellers. 

But I’d like to demystify the process a bit and explain why in Texas we have developed systems to help the whole “low appraisal” issue become more manageable and less stressful.

First, lot of buyers and sellers don’t get why appraisals are even necessary. If the buyer and seller have agreed upon a price, then what’s the problem? The problem is lenders want an objective assessment of the property’s value, with the emotion taken out. Lenders want to know if the worst-case scenario happens, and they have to foreclose on the house in the next year or so, that they will be able to turn around and sell it without incurring a loss. 

Most buyers who are financing the purchase of their home through a lender will be required to get an appraisal on that home. There are some exceptions. If you’re putting more than 20 percent down, the lender might be willing to do what’s known as an appraisal waiver and allow you to skip the appraisal process. But it’s not guaranteed – sometimes lenders still want an appraisal even with a substantial down payment.

Several years ago, the Texas Real Estate Commission came out with a new addendum to our contracts that allows a buyer to tell a seller ahead of time how they will handle a low appraisal. The buyer can tell the seller if they are willing to make up the difference if the appraisal comes in low. This addendum has become mandatory in the Austin market if you’re in a multiple-offer situation. As a buyer, you want to craft an offer that re-assures the seller as much as possible that there won’t be stumbling blocks in the contract-to-close process. 

I usually sit down with my clients when writing offers to go over this addendum in greater detail, how it works, and what makes sense for them based on their financial situation and the home that buyer is interested in. And with sellers, I explain the importance of insisting on this addendum when offers come in over asking price. 

The only time you can get away with NOT using this addendum or checking Box #3 — which protects the buyer and not the seller — is when there isn’t competition and you’re the only offer. Then a buyer can just offer whatever price you want and if the appraisal comes in low, just re-negotiate.

Don’t stress if this all seems like a lot to take in! That’s what I’m here for, to help you navigate a complex process in a way that protects your best interests.