An interesting question was posed on Trulia Voices yesterday:
“John”, a self-identified home buyer in Gilbert, AZ asks:
Should I get an appraisal ? Cash buyer.
I am buying a home in Gilbert Az.. 85296, it is a short sale. Sale price is approx, $265,000. I am getting an inspection on the property but was wondering if its worth the expense to get an appraisal. Price seems in line with other similar homes I have seen in the area based on square footage and condition. What % of time do the appraisals come back less than the sale price ??
Several agents responded to the question, and the general consensus was that yes, the buyer should get an appraisal.
While open forums like Trulia Voices have been known to drive me crazy, they do provide a great way to see what kind of questions/concerns real estate buyers and sellers have. And reading some responses from “professionals” will either make you laugh, contemplate jabbing a fork in your eye, and occasionally make you say, “That dude knows his stuff”.
Enough on Voices and similar platforms. Here are my thoughts on whether a cash buyer should get an appraisal. Of note: the contractual and other statements here only apply to those utilizing the standard Arizona Association of Realtors Residential Resale Purchase Contract. Mileage will vary for those in other states, or those foolishly using a contract form purchased from Office Max or printed from “FreeRealEstateForms.com”.
Lenders require an appraisal. They want assurances that the property they are lending on is valued at or below the loan amount. A cash buyer on the other hand, isn’t dealing with a lender and therefore is not required to have the property appraised. (Though I’d think a cash buyer would want the same assurances on value…)
Required or not, personally I think an appraisal is a good idea. If for no other reason than it may provide some peace of mind that you are getting what you’re paying for. Getting a professional “third party” opinion on the value of something as significant as a piece of property just makes sense.
This begs the question though, of what – if anything – does it mean if the appraisal comes in lower that what you’ve agreed to pay?
What can you do if the appraisal comes in low?
It depends. In the standard Arizona Association of Realtors Residential Resale Purchase Contract, there is boilerplate language that protects a buyer with an appraisal contingency if the buyer is financing the property.
2c. 59 – 61. Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised values to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.
However, there is a short little statement in line 49 of the contract that effectively removes this contingency for cash buyers:
49. IF THIS IS AN ALL CASH SALE, GO TO SECTION 3.
A cash sale results (in effect) in the entirety of Section 2 (Financing) to be removed from the contract. Section 2 is where the appraisal contingency lies. So if you pay cash, you don’t have the “out” that the appraisal contingency provides.
Personally, I think this is a flaw in our current contract language. But the simple fact is, no contract can contain enough boilerplate language to cover every possible scenario and protect everyone from an incompetent preparation of the contract.
The solution is (relatively) simple. The Arizona contract provides an area where “additional terms and conditions” can be written in to the contract. Have your agent add language that will provide an appraisal contingency for a cash purchase.
I suspect right about now, some real estate agent and/or broker is saying, “Whoa buddy, only attorneys can add language to a contract or purchase agreement!” And that is true in many states. But out here in the wild west, Article 26 of the Arizona State Constitution grants licensed real estate brokers and salespersons “the right to draft or fill out and complete, without charge, any and all instruments incident thereto”. In English, licensed Arizona brokers/agents can complete real estate contracts. This may, or may not, be the case in other states.
I think Steve Belt summed up the question of whether or not a cash buyer should get an appraisal when he said, “You are spending $265,000, spending another $350 for the appraisal seems like common sense to me.”
Indeed.
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California purchase contracts separate out financing from appraisal contingencies, this works well for cash buyers. It always amazes me that people try to avoid paying (or pay as little as possible) for appraisals when it could save them thousands of dollars. I am a certified appraiser (even though I don’t appraise any longer) and know that even if a buyer has a really great agent, most agents do not look at value the same way as appraisers.
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Same goes here in our province. In the additional terms and provisions just add a clause stating: “See schedule “A” attached to and forming part of this agreement” You can add whatever you like in the schedule. Our association actually has an appraisal clause that you can add from webforms directly into the schedule and just fill out the blanks with regards to dates etc. Does Arizona have something similar?Cheers!
Not getting an appraisal when paying with cash is kind of like not getting an inspection. Comps from agents are good, but an appraisal is better and the expense isn’t much.
**Sam´s last blog post..South Lake Travis Real Estate Prices and Inventory- Ouch!
Great information! I agree, that buyer would be better off getting the appraisal. I know its more money to spend, but sometimes that little bit of extra money can end up saving you thousands. Wouldn’t you pay a hundred to save a thousand?
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I would agree; when spending that much cash on a home, the small amount for the appraisal is a smart idea.
Yes, and in our neck of the woods appraisals are being scrutinized heavily by lenders and moreso being watched by the Feds…or at least everyone thinks so with all of the malpractice in the past. I would certainly get an appraisal. Definately shows an unbiased report since the appraiser gets paid whether you are happy with it or not.
In the Arizona contract you mentioned, you can certainly use “value” (as specifically mentioned in the contract) as a reason to cancel a contract during the inspection period. So there is a de facto “appraisal contingency” during the inspection period. The buyer would just want to order the appraisal immediately after contract acceptance and make sure it gets done during the inspection period.
If, however, the buyer doesn’t want to spend the money for an appraisal until after the inspection period is over and any inspection problems are resolved, then the buyer would want a specific appraisal clause in the all cash offer.
The seller, however, might very well counter that the appraisal contingency expire X days after contract acceptance so the contingency doesn’t hang over the transaction the entire escrow.
Getting an appraisal of something that you would like to buy is just normal. Don’t even think that it’s just a waste of time because your hard-earned money is at stake here. Thanks for sharing this useful info.
First of all I think the question should be, Should I make the offer contingent upon an appraisal? First, I would never recommend to a client/buyer of mine to pay cash on a property and not get an appraisal unless beyond reasonable doubt valued was there. It is not very hard to pull comps on a property and find out the value that an appraiser would come up with. I would say consult with your agent before proceeding. I am assuming you are buying a property that “a DEAL”, if that is the case I am sure you are trying to make your offer look the most appealing, and therefore feel paying cash will be more appealing to the seller? Again consult the professionals, your agent will be able to help you in this area. And then of course the old sane, go with your gut. If you feel you need an appraisal to be comfortable, I would say it is worth the $300 or so…
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@John – Excellent points, as usual! When I write a cash appraisal clause, I leave it “open ended”. If I had the seller though and someone wrote an open ended contingency, I’d definitely counter back with some time-bound ending.
I don’t have enough data to draw a conclusion as to how many listing agents would catch an open ended contingency. I like to think most would but…
What if the property is clearly undervalued compared to other homes in the area? Is it still worth it to try to get the appraisal when you know it will come in at less than other surrounding properties? Or should you just concentrate on getting a really good inspection?
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Wonderful tips and information, as usual! I agree completely-when you have that much cash out on the limb, getting an appraisal is well worth the small extra expense, esp if it happens to come back that you are about to pay way too much for a home. In the long run, it could save you thousands.
Nice advice. Im currently trying to buy a property in Spain, is there any one who I should get in touch with for advice on the differences in the market?
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I would agree an apraisal is a smart idea; however, if you love the home, plan on living there for a good number of years, feel the price is in line with other comparable homes right now, and feel you are getting a good deal and don’t mind if the home ends up being worth to the bank a little less than you paid, it wouldn’t be a horrible thing to skip. I would NEVER; however, skip an inspection.
**Margaret Safford-Metro Atlanta Real Estate´s last blog post..Does the Metro Atlanta Real Estate Market Mimic the New HGTV Shows?
For the small amount that an appraisal costs, when compared to the amount of cash that buyer is dishing out for the home, an appraisal would be highly reccomended. It could save you money in the long run, or just let you know that you are over paying for your dream home. Either way, you can then make in informed choice to go ahead and pay what the seller wants because you just love the home and don’t care, or you can try to get a lower price, OR you can see if you are able to walk away by having your agent add in a clause. Either way, I would lean on the side that it is best to know what it is worth, instead of assuming.
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Jay,
Every home buyer should strongly consider getting an independent opinion of the property’s value on a cash sale. An appraisal costs quite a bit of money, while a real estate agent can do an BPO, which also is very accurate. I wouldn’t do a major purchase like this without getting some recent stats on nearby property values.
Hi Jay. This was indeed one of the better Q&A’s on Trulia in the recent past for the Phoenix area, which has been a little lacking of late. Naturally, I agree with me.
**Steve Belt´s last blog post..Fannie Mae HomeStyle Renovation Loan: Ideal For Investors
It’s hard to believe the the Arizona Realtor association doesn’t have a standard appraisal rider that can simply be added to the contract. The St. Louis association has a number of riders, including an appraisal rider. Our rider gives the buyer 15 days if the contract is not contingent on financing, or matches the loan commitment date if it is contingent. It allows buyers to terminate if it doesn’t appraise for sale price, but what often happens is that an agreement and amendment is added to the contract lowering the sale price to the appraisal price. Or, the buyer can move forward and pay the difference between the appraisal and the sale price if they are using a lender. Rarely would I recommend this. But, if sale price is just a few thousand dollars above appraisal price, a buyer really wants a house and the seller just won’t drop their price, it does occasionally happen.
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I would agree that an appraisal is worth the small extra cost, but would say that for cash buyers it would be wise to add a clause to their contract that offers them the way to back out , or lower their offer if the house appraises for much less than the asking price. Being a cash buyer, they have great bargining power, and should take care to make sure they are actually paying a fair price.
I have always struggled a bit with this question from a professional perspective. I often get heat from appraisers when I say that an appraisal is just an opinion of value. In this case they are a educated opinion of value with a set of pre-determined premises to build that opinion, but none the less it is an opinion. In addition there is no reason why one cannot use the same adjustment guidelines appraisers do against a set of comps. to come up with what would be the anticipated market value for the property. The only true advantage I see to having an appraisal is that you will recieve an estimate for the replacement cost of the property.
With this said I would say that if having an estimate of replacement cost means a great deal to you or if you do not trust your agents market knowledge and/or ethics, then why not put out the $400 that it costs for the appraisal. Now if you have an agent you believe is trust worthy, has excellent market knowledge, and is willing to do the adjustments to the comps for you then I just don’t see the need to lay out the money.
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I have been guilty of purchase a property without getting an appraisal, but only because I knew the area very well and the market was going. I did end up losing money on that deal though, so lesson learned.
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Getting an appraisal is a must. If anything else it gives the buyer the ease of mind and let him/her sleep easier at night.
I would agree that it is a wise spending of a small additional cost to go ahead with an appraisal when it comes to protecting the large investment of a home.
Yes, getting an idea of the value of a property is always a good idea. The question is, can the average person find and use ALL the same info as a certified “appraiser”? According to the other “professionals” on this board, “NO” , you must pay a “professional”. The real truth is that ANYONE can access and use the exact same info as any appraiser. Given that appraisals did ABSOULTELY nothing to stave off the current real estate crisis, I would have to honestly question the value of a $400 piece of paper and the obviously temporary “peace of mind” it might offer. Any intelligent person with a cash offer should be able to do some reasearch and arrive at a realistic CURRENT value that might hold up for, at most, a month or two. Peace of mind is an elusive thing based mostly on faith and “professional advice” that doesn’t intersect with reality a great deal of the time. Good luck out there and trust your own instincts!