Beware Postponing the Appraisal

Once you’re under contract we’ll want to order the appraisal. As the buyer, you will probably want to order a home inspection too.

There is a difference between the appraisal and a home inspection.

The appraisal is for the lender, to determine the value of the home and to justify the amount of the loan. The appraiser reviews the property, evaluates it’s condition and compares it with similar properties that have sold in the area to estimate the properties value.

The inspection is for the buyer. A home inspector will conduct a more thorough inspection of the property, looking at the structure, the roof, evidence of pest infestation etc… to give the buyer an idea of the properties condition and to alert the buyer to any potential issues.

An appraisal can cost between $450-$500 while an inspection can cost between $200-$300. For this reason, many buyers want to hold off on the appraisal until after the inspection. It doesn’t make sense to pay for an appraisal if the inspection turns up issues that could lead a buyer to walk away from the property.

But be careful of waiting too long.

An appraisal will generally take between 5-10 days to complete after it has been ordered. But that doesn’t guarantee the appraisal process is complete within 5-10 days. Once the appraisal is ordered the appraiser has to contact the seller or the seller’s real estate agent to schedule the appraisal. The appraisal has to be conducted, the appraisal report has to be written and it has to be submitted to the buyer and the lender.

Once received the appraisal report will be reviewed. If everything goes well the property will appraise for the selling price without any issues, be accepted by the buyer and the lender and the sale will proceed unimpeded. If the property doesn’t appraise for the sales price or the appraisal report turns up issues with the property, however, the buyer may need to begin negotiating with the seller to make repairs and/or changes to the sales contract. This process will extend the timeframe and could affect the defined closing date.

It is also possible the lender has additional clarifying questions for the appraiser. There may be questions about the properties the appraiser used in establishing the estimated value. There may be questions about how the appraiser determined the value, or there might be questions about the statements and comments made by the appraiser in the report. This too may extend the timeframe for completion and could affect the defined closing date.

Here’s an example.

We were recently working with a buyer on a home purchase. The contract was accepted and the borrower scheduled the home inspection which uncovered issues with the roof. The buyer began negotiating with the seller and didn’t want to order the appraisal until after they had ironed out the issues with the roof.

Holding off on the appraisal, in this case, is understandable but the negotiation dragged on for more than a week. This was on a transaction with less than 30 days to close and included a major holiday. I had strongly recommended moving forward with the appraisal as soon as possible and communicated that holding off on the appraisal put the close of escrow at risk.

Still, the buyer held off.

Nearly two weeks after I initially recommended proceeding with the appraisal the buyer consented.

The appraisal company scheduled and conducted the appraisal and had the report back to us within a week.  But then the appraisal report was submitted to the lender and went into underwriting where it was flagged for a desk review.

Over the long holiday weekend.

A desk review means the lender has a second person review the appraisal. There are many reasons a desk review might be requested. In our case, the desk review was requested because the lender had questions pertaining to the comparable properties. There were questions about how many properties were used in estimating the subject property value. There were questions about why some properties were used in comparison but not others. There were questions about the sales dates of some of the comparable properties used in estimating the subject property value.

Those questions were sent to the appraiser to answer.

I was told the desk review would take 2-3 days. In our case, it took the full 3 days for the appraiser to answer the questions and for the lender to review those answers. Meanwhile, we lost 2 days to the holiday which left us waiting for the clear to close with one day to close of escrow.

When the lender responded after the long holiday weekend they had clarifying questions for the appraiser.

And there goes closing on time.

We did get clear to close but it was midday on the day we were originally supposed to close effectively pushing us to the following day.

One day late.

There was a lot of stress those last couple days and a lot of questions. The borrower, the seller, and their real estate agents couldn’t understand why the appraisal was taking so long, expressed concern about the deal and grew frustrated with the process.

That is understandable but it’s important to understand that sometimes these things happen. It is not unusual. In general, however, it happens behind the scenes and the back and forth between an appraisal company and a lender isn’t visible to the borrower, the seller of their real estate agents.

In our case, the back and forth between the appraisal company and the lender was very visible because it was the last condition to clear before the loan could close. And the reason it was the last condition to clear is that the appraisal was ordered so late in the process that there was zero margin of error.

Keep this in mind as you work through the home inspection and appraisal process.

For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.

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