October 11, 2023

Wishing for a high appraisal? Why you may not want that to happen

One of the elements of a real estate transaction that causes the most angst is waiting for the appraisal to come in. Parties to the transaction want the appraisal to be high enough to meet or top the selling price so that the lender will agree to lend the amount needed for the buyer to purchase the property. But while you may be wishing and hoping for a high appraisal, it may not be in your best interests to have an overinflated appraisal report.The debacle of 2008 that led to the Great Recession taught us what happens when property values are pushed beyond the boundaries of common sense and true worth. Let’s take a quick look at the purpose of an appraisal and how it is designed to protect the lender’s investment and the homebuyer’s equity.

The purpose of the appraisal

A lender requires a raft of information about a prospective homebuyer and a property before it is willing to loan money for the purchase of the property.  The appraisal is one of the most critical tools because it is designed to give the lender a comprehensive understanding of the value of the home in relationship to the general market conditions of the vicinity and the specific value of comparable homes that have sold most recently.

How an accurate appraisal protects the lender

The lender needs to be assured that in the event the borrower cannot meet their obligations the lender will be able to recoup their investment if they have to repossess the property and resell it. If they loan too much against the property and it declines even modestly in value during a recession, an inflated appraisal may result in the lender taking a loss on the property when they try to resell it.

How an accurate appraisal protects the homebuyer

No matter how much a homebuyer desires a particular property, they need to know that they are getting equivalent value for what they are paying. Real estate is one component of building wealth in the U.S. and investing appropriately in a property helps homebuyers build substantial equity over time. Taking on a property that is over-inflated in price diminishes the homeowner’s ability to build equity.

The ultimate threat: Underwater mortgages

In 2008 when homes began to rapidly deescalate in value due in part to the overvaluation of homes and in part to the recession, many homebuyers found themselves “underwater”, that is owing more on the home than it was worth.

For homeowners who may have lost their jobs in the recession and needed to sell get out from under a mortgage they could no longer afford, they soon discovered they were unable to sell the homes for a sufficient amount to pay off the mortgage. For many, foreclosure and bankruptcy were inevitable.

In many cases, had the property been valued appropriately to begin with, the homeowners may have escaped the more dire consequences.

So, while everyone in the transaction is wistfully hoping the appraisal matches up with the sale price, what a homebuyer should be hoping most for is an honest appraisal that alerts them to the value of their investment.

Just as the role of the professional appraiser is to protect the integrity of the transaction for the lender and the homebuyer, at Kriss Law/Atlantic we are here to protect the integrity of the title, escrow, and closing process to ensure a safe, secure and accurate transfer of title to a property. Call us to learn more.

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