The REAL Purpose of Appraisals
What is the purpose of an appraisal, in the context of a residential real estate sale?
To make sure that, if the Buyer defaults on their loan and the lender ultimately forecloses, the value of the collateral is sufficient to make the lender whole.
Or, in plain English: if the lender gets stuck with the home, it can sell it for at least as much as the mortgage.
“Multiple Offers,” Defined
Now, consider what happens in multiple offers.
The owner lists their home, and not one but several would-be Buyers submit offers.**
After sifting through each offer’s strengths and weaknesses, the owner chooses one Buyer to work with, and ” after tweaking a few terms (closing date, earnest money, etc.) ” ultimately enters into a Purchase Agreement with them.
Enter the Appraiser
A few weeks later, when the lender’s appraiser shows up, the question they should be asking isn’t, “what is this home’s value, based on the three most recent, similar sales (i.e., the Comp’s)?”
Rather, it’s this one: “if the lender needed to re-sell the home, is there another Buyer who’ll pay (approximately) what the first Buyer paid?’
In multiple offers, the answer is unequivocally “yes.”
In fact, it’s “yes ” several Buyers would.”
Role of Down Payment; Loan-to-Value Ratio
At least when I handle multiple offers as a listing agent (representing the Seller), one of the key terms besides price is the size of the Buyer’s down payment.
As a general rule, the higher the down payment, the stronger the Buyer is financially ” and the lower the risk to the owner that the Buyer won’t be able to finance the purchase.
Of course, as the Buyer’s down payment gets bigger, the mortgage’s loan-to-value ratio goes down, too.
That insulates the lender from loss in the unlikely event they get the home back ” and increases the odds that the home will appraise (“heads up” to would-be Buyers competing in multiple offers now).
**Isn’t it possible that all offers in a multiple offer situation are disappointingly low?
But then, the owner is unlikely to enter into a Purchase Agreement with any of the bidders, in which case there’s no home for a lender to appraise.