Ideally, the purchase price of a house should be the same as, or very close to, the appraisal, but that's not always the case. Instability in the real estate market has made lending institutions cautious in their estimates of home values, and appraisals sometimes come in lower than the contract sales price. The buyer may have to bridge this gap with cash.
Setting the Selling Price
Typically, real estate agents research sales of similar houses in the same neighborhood over the past six months. They make adjustments based on the visual appeal of the property, highly desirable features like granite countertops and general price trends. For example, if three similar houses in your area sold for $225,000, $235,000 and $250,000, in that order, over the past six months, your broker can see that prices in your area are rising. Even though the average of these sales is $237,000, she probably will suggest you set your starting price at $260,000 or even $275,000 if your home has trendy extras. A higher price gives you room to negotiate and may give the purchaser satisfaction in buying for less than the list price.
Mortgage lenders require a professional appraisal before they will release money for a loan. Appraisers look at the average price of home sales in the area, the physical condition of the property and upgrades, such as replacement windows or an expanded kitchen. Bank appraisers tend to be cautious in their estimates because their job is to guarantee that the house is worth the amount that the bank is lending. They usually base appraisal figures on past sales rather than projected market trends or visual appeal.
If the Appraisal Is Lower
If the bank appraisal is lower than the contract sales price, the buyer must increase his down payment to cover the difference, but he may be unwilling or unable to do this. If the sales contract includes an appraisal or financing contingency, the purchaser may ask you to lower the sales price to the appraised value or to split the difference with him. The buyer may withdraw the sales offer if he is unable to come up with the additional cash he needs for the down payment and closing costs.
If you believe the appraisal is wrong, ask the buyer (who pays for the appraisal and receives the detailed report) if you can review it for accuracy. If the report contains errors -- for example if it cites the wrong number of rooms or omits mention of a comparable sale -- you can point this out to the buyer and encourage her to appeal. If the appraiser refuses to revise the report, the buyer can request a second appraisal. If you offer to pay for it, the buyer is more likely to agree. Choose an appraiser with specialized knowledge of your neighborhood for a more accurate second appraisal.
A retired federal senior executive currently working as a management consultant and communications expert, Mary Bauer has written and edited for senior U.S. government audiences, including the White House, since 1984. She holds a Master of Arts in French from George Mason University and a Bachelor of Arts in English, French and international relations from Aquinas College.