What is an Appraisal?
What is an Appraisal?
An appraisal is when the lender hires a licensed appraiser to determine a home’s market value.
The lender wants to make sure the home is actually worth the amount being borrowed.
Because, really, at the end of the day, the bank doesn’t really care what you are willing to PAY for the home. The bank needs to protect their investment.
The appraiser looks at things like:
recent comparable sales
condition of the home
square footage
upgrades
location
current market trends
After reviewing the property and comparable homes, they provide an appraised value.
Why Does the Appraisal Matter?
In most cases, the lender bases the loan amount on the appraised value, not necessarily the contract price.
So let’s say:
You offer $700,000
But the appraisal comes back at $680,000
The lender may only approve financing based on the lower value.
That leaves a $20,000 gap that suddenly needs to be addressed.
What Happens If the Appraisal Comes In Low?
Usually, one of a few things happens:
The Seller Lowers the Price
The seller may agree to reduce the purchase price to match the appraised value.
The Buyer Brings Additional Cash
The buyer may choose to cover the difference between the appraised value and contract price out of pocket.
Both Sides Negotiate
Sometimes the buyer and seller will meet somewhere in the middle.
The Deal Falls Apart
If an agreement can’t be reached, the transaction may terminate depending on contract terms.
What Is an Appraisal Gap Strategy?
In competitive markets, buyers sometimes use something called an appraisal gap strategy.
This means the buyer agrees adead of time to bring in a certain amount of additional cash if the appraisal comes in low.
For example:
Offer Price: $700,000
Appraisal: $680,000
Buyer agrees to cover up to $20,000
This can make an offer more attractive to a seller because it reduces the risk of the deal falling apart due to a low appraisal.
But What If the Homes Appraises HIGHER Than the Purchase Price?
This is usually great news for the buyer!
If a buyer is under contract at $700,000 and the home appraises for $725,000, the contract price generally stays the same. The buyer does not suddenly have to pay more.
Instead, it means the buyer is walking into the home with instant equity!
The Bottom Line
A low appraisal does not automatically kill a deal, but it CAN completely change negotiations.
Understanding how appraisals work helps buyers make more informed decisions, especially in competitive markets.
Real estate terms can feel intimidating, but they don’t have to be.
Have questions about buying a home in Washington State? I’m always here to help 🖤