In today’s real estate market banks have a difficult time confirming the value of the homes they are financing, and consequently buyers have a hard time getting the money they need to buy their homes. To avoid the confusion on the price of a home, banks hire a third party assessment of a homes value, called an appraisal.
In an appreciating market appraisals are relatively easy because appreciation cushions the bank, so if they have to take it back it has most likely increased in value. This would bring ready buyers and the banks would not have to hold it before they could liquidate it. In a depreciating market, conversely, the bank may have to hold the home in their REO inventory for quite some time before they can sell it, making an accurate appraisal all the more important.
An appraiser can not just be someone off of the street. An appraiser is a formerly trained person who knows the trends and values of the local real estate market. The objective valuation an appraiser is supposed to provide cannot be influenced by buyer nor seller or the entire appraisal may be corrupted and unreliable.
The appraisal has to be a neutral valuation, no matter the certification, so that the best interest of the client, which is the bank, is best served. If this is violated then the appraisal has to be reviewed or thrown out altogether.
When, in the rare case, an appraiser cannot justify the financed amount for the subject property the course of action usually heads one of two ways. The transaction is either dropped and forgotten about, or the seller or the buyer will make an adjustment to allow the transaction to continue.
A very rare solution is for the buyer to cough up the difference, but they really have to like the property to do that, typically.
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