What is an appraisal? Say you are buying a house for 500k and you are putting down 20% (100k) and you are getting a loan of 400k. Before lender cuts you a check and invests 400k, they will contact an appraiser and have him take a look at the property and inform the lender that it actually is worth 500k. What is the point of this? Well, if you, the borrower, defaults on the loan, (says "I am not going to make my mortgage payments") bank needs to sell that house,(called foreclosure) to get their money back. Are you following so far? Well, what if in that scenario lender finds out that the house which was supposedly worth 500k, is worth only 250k? Say they sell it for 250k. Then they are now out 150k. Are you following? They spent 400k but only got 250 back. And banks are not in the business of LOSING MONEY. They are in the business of MAKING MONEY.
So, what measure to they take to avoid losing money? APPRAISAL. Appraisal guarantees that the property is worth what they are lending on it (500k)
So, what happens if in the above scenario, appraisal came in short of the purchase price, say 480k? In that scenario, buyer will go to the seller and say "I really love your house but lender wont lend me more than the appraised value of 500k because they are saying its not worth 500k. Would you sell it to me for 480k?"
Depending on many factors, seller might say "Yes", "No" or "Well how about somewhere in between, say 490k?"
Many factors could be:
-How many other good offers are on seller's table (more offers, emboldens them and makes them believe that they can back out of this transaction and sell it to another person for full price of 500k.)
-How fast do they need to close (if they are in a rush, they might bite the bullet and accept 480 just to close the deal and go about their business), -How bad they really need the 500k proceeds from this sale? (they might need every dime they can get in order to purchase another property and if they sell for 480k, they simply can't buy this other house)
If seller agrees to sell it at the appraised price, then buyer puts his money down, lender will lend for the rest and house is sold. End of story.
But if seller sticks to his guns and is adamant at getting 500k then two things can happen:
-Buyer will walk away, cancel the transaction and start looking for a property they can afford.
-Buyer will agree to "pay the difference out of pocket" and buy the house. This means they pay the 20k difference themselves (not a loan) and buy the house. In this scenario, they pay downpayment+ 20k+get a loan for the rest in order to buy the house.
Some buyers might not have that extra 20k and therefore walk away while some may choose to not pay the extra because they believe house isn't
worth it. "Why Would I pay 500k for a property which is only worth 480k".
Keep in mind that in a market (like ours) where property values are on the rise, that property might not worth 500k today but might worth that much in a few months. That's why lots of buyers have no fear of paying a bit more than the appraised value if the house they are getting, is their dream house and checks all the boxes. Remember that
we are in an aggressive, multiple offerry (just made that word up), seller's market and sometimes in order to get that beautiful house,one has to be bold and do things differently from the way they normally do. (Desperate times call for desperate measures)
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