Why cash buyers still need an appraisal
I received a call this week from a person that was purchasing a home with cash and he wanted to know if he should
get an appraisal. I thought I would share with you the reasons that I gave him in favor of why cash buyers still need an appraisal even though they are not getting a mortgage loan. The appraisal is not just for the benefit of the lender but has many good uses from the buyer’s perspective as well so let’s take a look at the reasons we discussed.
4 reasons cash buyers should get an appraisal
Verify you’re not over paying
This is the most obvious reason, but one that most cash buyers don’t consider since they are not getting financing. Your home is typically your biggest investment, or one of the biggest, so why wouldn’t you want to know that it is worth what the seller says? If you think about it you would never buy any another type of investment without knowing it’s real value so why do this with your house?
Sellers have a vested interest in selling their home for as much as they can so it is up to you to verify if the value they are asking is supported by the market. You see, this is the reason the bank gets an appraisal when they loan money to you to buy the house. They want to make sure that if they had to take the home back as a foreclosure that they could sell it for at least the amount they loaned you. If you had to sell the home in several months because you had to move or something unexpected came up then you want to make sure that you can get your money back. If you paid too much to begin with, and then had to sell, you may not be able to get back what you paid for the house, especially if the new buyer gets and appraisal and it doesn’t appraise because of lack of market support.
Know how your house compares to the rest of the market
In addition to an appraiser developing an opinion of value for the home they also compare it to other houses in the market with regards to things such as floor plan and design. If the home exhibits deficiencies in floor plan layout this effects its value in a negative way. Even though you think you will live in the home the rest of your life, and you’re o.k. with the “unique” layout, plans do change. If circumstances force you to sell, you may not be able to get what you paid because the general population doesn’t like the floor plan, or at least may pay less for the bad layout.
Tool for negotiation
Using the appraisal as a tool for negotiation should be top of mind for buyers. Appraisers get a bad rap when it comes to coming in low on appraisals but if the value is not there then the buyer should not be so quick to seek out an appraiser to rubber stamp the appraisal but rather as a tool to get the contract price reduced to reflect its true market value. The price of an appraisal will more than pay for itself in a situation like this.
Lower taxes
I recently wrote a post explaining how homeowners can save on property taxes by providing evidence that the assessed value is too high. If the price you pay for the home is less than the tax assessment, and the price is true market value, then the appraisal and sales information can be used as support to lower the taxes after you purchase the home. As I stated in that post you will want to make sure that the price you pay does not reflect a foreclosure sale because the county tax assessor does not recognize these as true comparables.
Conclusion
So as you can see there are numerous reasons why cash buyers still need an appraisal. Just because you will not be getting financing, and an appraisal is not a requirement, it can still provide many benefits that can save the buyer a significant amount of money. If you have anything else to add please leave a message below.
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To add to what Jason Fischman ABCDEFGHIJKLMNO (he is a friend, so I give him a hard time about his Gene Simmons “tongue like” designations (I’m really just bowing down like groupie I am)), I too compliment cash buyers on being smart to get an appraisal. I point out that when a bank acquires a home, they always get an appraisal. When a relocation company acquires a home, they usually get two appraisals. Smart people and smart companies get as much information as they can before making a big decision.
Good one Gary! Jason does have quite a few designations to his name. 🙂
These types of appraisals are definitely relevant, especially in an area where properties are not cookie cutter homes. In this market I am finding quite a few tenants buying from their landlords too. While they are not paying cash, the landlord often hires an appraiser to help establish a price with the tenant. In any transaction it’s important to pay a fair price. If the parties involved are not in tune with the market, it can definitely be an advantage to reach out to a local appraiser.
That is so true Ryan. The market is not like it was before the crash, where there was good appreciation. If you paid too much then you just had to wait a little bit and the market would catch up, but unfortunately it is not that way anymore.
As usual, great topic Tom. Whenever we receive a call from a cash buyer, I make it a point to compliment them on their prudent decision to have an appraisal done. I just completed one a few days ago where the contract price was 1% higher than my opinion…not a major difference, but at least the buyer was able to make an educated choice. I have completed others where the disparity was much greater. If a buyer is fortunate enough to have enough cash to invest in a property, it only makes good sense to invest roughly 1/10 of 1% of their investment to have a professional appraiser provide an opinion of the market value of the property. Thanks!
I agree Jason. One tenth of 1% is definitely worth it on such a large investment. I have seen an uptick in cash buyers getting appraisals as well so I’m glad to see that they understand the importance.