I was asked today by a Los Angeles home buyer “what do you mean when you say the home has to appraise.”
When a buyer makes an offer on a property they are relying on their Realtor® to have done a competitive market analysis (CMA) based on previous sales in the area. However, the CMA is nowhere near as detailed as a professional appraisal.
If you are buying a Los Angeles home with a loan then your lender is going to send out their appraiser to make sure that the home is indeed worth what you are paying for it. The appraiser may be on staff or independent, but they will be fully licensed. You, the buyer, will be paying for this appraisal.
Simply put, the appraiser, through various formulae, will determine the value of the home. If the home appraises for the price being paid then the processing of the loan should continue smoothly. If it does not appraise for the full value then you as a buyer have three options: you can ask the seller to lower the price, you can make up the difference between the appraised value and the amount you have contracted to pay, or you can cancel the contract.
In California, one of the contingencies you will be requesting is an appraisal contingency, which you will have together with a loan contingency. This allows you to cancel if the home does not appraise (or if you do not get the loan).
If you are an all cash buyer, you generally will not select the appraisal contingency. However, if you have any doubt that you are paying the right price for the home, it would be wise to make sure that contingency is in place. In this case, you will hire your own appraiser. You also have three choices: ask the seller to lower the price, cancel the contract or live with the fact that you may be overpaying.
Since the appraiser being used may be either inexperienced or from out of the area, you may also request a second appraisal, especially if you disagree with the findings.
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