Why is an appraisal important?

An appraisal will ALWAYS be required if you are financing the property through a traditional lender.  The appraisal process is in place to verify the existence of the property, as well as get a general feel for how the property stacks up against other homes in the vicinity.  This protects the banks, as well as may protect the buyer from purchasing a home that may be WAY overpriced compared to other surrounding homes.  I have seen deals where the price is agreed upon between the buyer and seller, and then the appraisal comes in, and the value is $10,000 below what the buyer and seller agreed upon.  What happens then?  That is a great question...  There are a few things that CAN happen. 

First, the seller may lower the price by $10,000 to match the appraised value, because he knows that another appraiser will not be able to raise the value of the appraisal.  Also, the banks will only use the value of the appraisal for lending purposes (not take into account the fact that the buyer and seller agreed on a different price), and now the real estate agents have a fiduciary duty to disclose this to any future buyers/banks should this deal fall apart.

Second, the buyer and seller may agree on a negotiated price somewhere in the middle, BUT the buyer will have to come in with additional cash, because the banks will only value the property at the appraised price.  So, for example, if the buyer and seller originally agreed on a $400,000 sales price, but the appraised value comes in at $390,000, the banks will only lend on the $390,000 price.  So if the banks set up the financing at 80% LTV (Loan To Value), originally, the buyer was expecting to get a loan for $320,000.  And they would put as a down payment $80,000 (20% Down Payment.)  Well, when the appraisal comes in low, they negotiate to meet in the middle, so if they split the $10,000 appraised value down the middle, and meet at a sales price of $395,000, the bank will still only loan 80% of the APPRAISED VALUE of $390,000, or $312,000, but now the buyer will have to come in with an $83,000 down payment to make the deal work for everyone.