Studies have shown that people will make a purchase based on emotion then use logic to justify the purchase. There are countless articles on emotional versus rational decision making processes in purchases. These buying motivations can vary greatly from socio-economic backgrounds to gender to demand. Have you ever made a purchase and then questioned if it was a ‘good deal’ or wondered if you ended up over-paying in the heat of the moment? When buying a house, we’ve discussed the number of inspection contingencies available to safeguard your purchase and protect you from costly repairs down the road. As a buyer, you are also protected by an appraisal contingency.

Investopedia defines an appraisal as a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. Please note, REALTORS® are not appraisers. We have access to tools and resources that help us get pretty close to fair market value but if you want a professional valuation of your home, hire an appraiser. If you finance your house, your lender will order an appraisER to perform an appraisAL. The lender will want to make sure the house is worth what they are lending you. Worst case scenario, you default on your mortgage payment and it goes into a bank owned foreclosure. We will discuss foreclosures later this year.

In layman’s terms, an appraisal contingency reads as if the property’s sale price does not ‘appraise’ at market value, the Purchaser does not need to buy and the Seller does not need to sell. In many cases, the seller agrees to adjust the sale price to meet the market value. The Purchaser may not be willing to pay extra for an investment that they are technically already ‘in the hole’. However, it may not be financially feasible for the seller to adjust the price as maybe he/she invested time, money, and resources into home improvements. Selling for less than the sale price may not be a profitable option for the seller. If an agreement is not reached between the buyer and seller, the purchase agreement may be terminated. Conversely, if the appraised value is greater than the sale price, the Purchaser retains immediate equity in the home. Nothing needs to change with the loan process and you’re one step closer to closing.

In today’s aggressive market, the appraisal gap can be exercised. An appraisal gap is when there is a difference between the fair market value determined by the appraiser and the amount you agreed to pay for the home. An appraisal gap doesn’t mean you have to cancel the sale, but it may mean you have to negotiate with the seller or pay the difference for the home out of pocket. My fellow REALTORS® and I have worked with buyers willing to pay several thousand dollars on an appraisal gap to secure their desired home in a competitive market.

Until next week, love where you live. And if you don’t… contact your local REALTOR®.

Brian Haufe, 2022 MBOR President