What if the Appraisal is Higher than the Offer? Exploring the Implications

As a real estate buyer, you may find yourself in a situation where the property appraisal comes back higher than the offer price you initially made. This is a common query, and it’s important to understand the implications of such a scenario.

Understand the Appraisal Process and Its Ownership

The buyer typically orders the property appraisal as part of the purchase process, and the cost is usually borne by the buyer. This means that the appraisal report belongs to the buyer and does not need to be shown to the seller unless explicitly required by the contract or lenders.

In most cases, the seller remains unaware of the appraisal value unless they specifically request it or it affects the deal. Once you have signed the contract for the purchase price, the appraisal result usually does not alter the agreed-upon price, assuming it does not vary substantially.

Dealing with a Higher Appraisal

Even if the appraisal comes back higher, it generally does not change the agreed purchase price unless the buyer or the lender insists on a higher valuation. The underwriter may question the appraisal result, but this is usually because they are verifying the seller's documentation, which is typically a separate process.

In the case of a house purchase, the seller usually commissions their own appraisal before listing the property with a bank or other financial institution. If there is an auction, the person running the auction typically uses the lowest starting estimate as a baseline and allows for some flexibility. Sellers can set higher prices, but this is subject to market demand and other factors.

Implications and Scenarios

An appraisal is essentially a professional opinion on the property's current market value. This valuation can be used for various purposes, including property insurance, replacement cost, and retail market value. It’s important to note that the appraisal does not guarantee the exact amount of money a buyer can retrieve when selling the property.

In some cases, buyers may achieve prices higher than the appraised value, but this depends on numerous factors, such as market demand, economic conditions, and the specific circumstances of the transaction. If an appraisal is significantly higher, it could even work to the buyer's advantage, potentially increasing their equity in the property.

Considerations for the Buyer

For the buyer, a higher appraisal is generally a positive development, indicating that they are purchasing a property with built-in equity. This can be a sign that the investment is performing well or that the property is in a desirable market.

However, if the appraisal is lower than the purchase price, this can be problematic. Unless the buyer is willing to pay more or the seller is willing to lower the price, the deal may not proceed. This is a warning signal for buyers to be cautious about the appraisal value and ensure that they have adequate financial resources.

Conclusion

The appraisal process is a critical aspect of the property buying process, but it should not overly influence the buyer's final decision. A higher appraisal can be a cause for celebration, as it suggests good equity, while a lower appraisal may necessitate careful financial planning. Understanding these nuances can help buyers and sellers make informed decisions in the real estate market.