Insights from a San Jose Realtor: Why Do I Need an Appraisal?

Buying in San Jose: The Importance of Appraisals

Congratulations on successfully having your offer accepted for a property in San Jose! As industry experts, we understand the importance of the appraisal process and its role in securing your investment. Allow us to shed light on the significance of appraisals and how they safeguard your interests. Let's delve into the world of appraisals together!

An appraisal is a professional assessment of the value of a property conducted by a certified appraiser.  It is not something you need to organize– an appraisal is commissioned by your lender in order to get an understanding of the asset before approving your mortgage loan. 

Why do lenders care about appraisals? Lenders want to ensure that the property they are financing is worth the amount they are lending. The appraisal report serves as a crucial document for lenders to assess the risk associated with the loan and make informed lending decisions. Basically, lenders want to make sure that if they lend out the money, they can get their money back.

Appraisals can benefit you, as well, but only if you’ve included an appraisal contingency in your offer. Appraisal contingencies are standard in some markets, and rare in competitive ones.

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How Appraisals Work: A Step-by-Step Guide

As soon as you have a signed offer and begin working with your lender on securing a loan, the bank will schedule an appraisal. Here’s the process you can expect:

Step 1: Engaging a Knowledgeable Appraiser

This independent appraiser has knowledge of the local market and is tasked with writing up a report on the home’s value. The appraiser gets your purchase agreement, so they know how much you purchased the home for.

Step 2: Thorough Property Inspection

The appraiser visits the property, inspects it, and takes notes. They’ll note the number of bedrooms and bathrooms, square footage, and take a look at the neighborhood. Their goal is to get a good sense of the property. 

Step 3: Researching Comparable Sales

The bank assumes the property was sold on the open market, so they want to research similar recent sales. They try to find the closest possible matches –– they look for a home that’s the size and square footage, within a half mile (no more than one mile), same zip code and school district, and ideally sold within 30-60 days. The appraiser needs to gather 3-5 sales and 2-4 pending sales. The appraiser will adjust comps if there are not as many bedrooms or bathrooms.

Step 4. Generating the Appraisal

Based on the data collected, the appraiser will generate an appraisal which includes an appraisal price. In the ideal world, the home is appraised for exactly what you bought it for. In competitive markets, homes sometimes appraise for less.

Appraisal Contingency: Navigating the San Jose Housing Market

What is the difference between an appraisal price and the purchase price?The appraisal price is what the bank values the property at. Depending on the market condition, this price can have different relationships with the offered price and final contract price. Stay informed with the latest San Jose housing statistics each month to make well-informed decisions. Our expertise ensures you have trustworthy data at your fingertips.

What happens if the appraisal is less than what I paid?

Because the market is so hot in San Jose, it is not uncommon for homes to be appraised for less than the purchase price. This doesn’t happen all the time, but it’s certainly not unheard of.

If you have an appraisal contingency 

If the appraised value comes in lower than the agreed purchase price, it can serve as a point of negotiation, but only if you have an appraisal contingency. This does not usually happen in San Jose, however, as the market is hot and very competitive. If you have an appraisal contingency, you may choose to renegotiate the price or even reconsider the purchase altogether based on the appraisal results.

If you don’t have an appraisal contingency 

If you don’t have an appraisal contingency and the home is appraised for less than what you offered, then you are responsible for coming up with the extra money above the bank’s value to be able to close the sale. When the seller picks the buyer, they need to be confident that the buyer has the financial ability to make up for the cost if the appraisal comes in lower. In this scenario, the buyer has no ability to renegotiate. 

Understanding the current market, as well as local comparable sales, is crucial to deciding if you can waive an appraisal contingency. Work with an experienced real estate agent and great lender who can guide you in each situation. Learn more about setting up your home buying team in our Home Buyer's Guide.

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