Would you ever give someone a loan of $100 if you knew all you were going to receive back was $20? Probably not. For residential lenders like Opes Advisors, all financing requires an independent appraisal of the property’s current market value. Our Advisors recommend to our clients that an understanding of how an appraisal effects the pending deal can remove some of the worry associated with it.
An appraisal is a third-party opinion of value that helps lenders more closely determine the Loan-To-Value (LTV) ratio, one of the most important measures in all lenders’ risk management. Here is how the math works: Purchase Price – Down Payment = Loan Amount. Loan Amount / Property Value = LTV %. The property value lenders use to calculate LTV is the lower of contract price or appraised value.
In most cases, the appraisal will support the contract price, especially in the areas where Opes lends. Under the Comparable Sales appraisal method, a subject property can appraise higher than contract price, but never higher than the highest usable comp. When an appraisal comes in lower, however, Opes’ LTV calculation uses the lower appraisal number, which means we will be lending a percentage of that lower value rather than a percentage of the higher contract price.
If it comes in lower, the buyer would have to pay more upfront to comply with the original contract terms and price. More money could be put into the deal, the difference between the lower appraised value and higher contract price if available. Exercise the Financing Contingency, if there is still time, to terminate the contract and gain the deposits back. Negotiate the terms with the seller. Perhaps the contract price cam be modified or closing cost contributions from the seller can be increased to offset the difference.
An appraisal that comes in low can also be questioned. This can be done by questioning differences in size and features, how recently they sold, distance from the subject property, and whether the comps’ neighborhood or community are similar enough to the subject’s.
Understanding how an appraisal works can help Opes Advisors’ clients factor in some safeguard for your transaction. If an appraisal falls short of your dollar mark, it doesn’t have to sink your deal. It’s important for both buyer and seller to understand what goes into an appraisal and what their options are if one comes in lighter than contract price. Our experienced Advisors have seen all kinds of things happen.
While Opes Advisors, a division of Flagstar Bank, Member FDIC, uses all reasonable efforts to ensure that this information is current, accurate and complete on the date of publication, no representations or warranties are made (express or implied) as to the reliability, accuracy or completeness of such information. Opes Advisors, a division of Flagstar Bank, Member FDIC, therefore, cannot be held liable for any loss arising or indirectly from the use of, or any action taken in reliance on, any information appearing in this