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The 1st Home Appraisal That Saved Us Thousands

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First Home Appraisal
©iStockphoto.com – DSGpro

Welcome to my personal home buying journey. After spending years saving my down payment, I recently bought my first condo. I originally thought saving up the down payment would be the only hard part. I was wrong. The down payment is definitely a challenging goal, but the actual home buying process proved to be a whole other challenge. My first two attempts at homeownership (a new construction condominium and a short sale condo) did not work out. Today, I'll discuss my third attempt at homeownership, another home that we ended up passing by. Cutting right to the punch line: When buying your first home, make sure to get an appraisal before removing contingencies. We are so lucky our real estate agent gave us this advice because otherwise we would have made a terrible decision, ending up with the wrong home in an already difficult market.

The Purpose of Getting a 1st Home Appraisal

The fist home appraisal accomplishes a few simple goals. Fist and foremost, it will validate the offer price on the property. The price you offer on the property may be above its market value. If so, this is something you will want to know. This is a buyer's market right now. Make sure to get a good price on your first home. You will want to make sure to work with your real estate agent as well to make sure you are offering a price which will actually appraise. An interesting fact is that appraisals are typically coming in lower these days. The market is rough and banks want to get an accurate picture of the home's value.

The second purpose of the appraisal is to validate the square footage listed by the seller. Just because the seller lists a certain square footage, it may not be accurate. The appraiser's job is to survey the property with modern measurement equipment to get a very accurate representation of the livable square footage. Sometimes homes are not built perfectly to the specifications set forth in the builder's plans. Livable square footage can be quite different from what the seller thinks.

The third purpose of getting an appraisal is most banks require them these days. In other words, a big part of qualifying for a home loan on your first home is the property appraising at or above your offer price. If the property appraises less, the bank is not likely to approve your loan because they are taking on risk. Should you not be able to pay your mortgage (which is happening to many homeowners right now), the bank will not be able to sell the home for the price you paid if the appraisal is lower than the purchase price.

Making Your First Home Offer Contingent On The Appraisal

As you get ready to make an offer on your first home, the word "contingency" is going to become your best friend. High level, setting up contingencies correctly in your offer letter will protect you and mitigate risk. Things can and do go wrong in the home buying process and you want to protect yourself from acquiring a home that has problems.

Let's define the concept of contingency. It basically means that your offer is only good if xyz items (contingencies) get crossed off your due diligence list. Possible items that can be contingencies are property inspections, termite inspections, review of disclosures and documentation, the appraisal, and even the ability to obtain financing. When the seller accepts your offer, it becomes a legally binding contract (regardless of issues that may arise such as ability to obtain financing, improper square footage, and termite problems). With the appropriate contingencies in place, you can still back out of the deal if the appraisal comes back with problems (or if other problems arise depending on which contingencies are in the contract). Again, the moral of the story is to make sure your offer is contingent on appraisal and financing. Only remove the contingency once you are certain that the appraisal has come back as expected and your bank has issued a loan commitment letter for financing. Without these contingencies, you may place yourself in a legally binding contract without the opportunity to get financing, an unfriendly situation.

My Personal Experience: The Appraisal Came Back With 10% Less Square Footage Than Expected

As you may know from the previous two articles, my home buying experience has been a tumultuous journey. It started off with a series of failed attempts at homeownership. This is one of those stories. As a side note, please don't get discouraged. I am now a homeowner in the condo of my dreams and everything worked out perfectly. My fiancee and I believe that there is a reason these first few homes did not work out. They were not the right homes for us. The purpose of these articles is to save you some of the learning experiences we had to live first hand and definitely not to discourage you from the American Dream.

The story here is actually relatively simple. We found a great condo that we placed an offer on. Our real estate agent was discouraging us all along from the offer, saying that the home was way too small for us. I rebutted with the square footage figures that the seller provided us. I knew it was small too, but thought we could make it work given the square footage numbers the seller provided. We made our offer contingent on the appraisal and financing. The appraisal came back one day before our contingencies were to expire with 10% less square footage than we expected. While the price did appraise, we felt deceived and knew that the home was just too small for us. It's hard to think rationally sometimes when you get emotionally involved in the home buying process. We loved the place and wanted it a lot. We tricked ourselves into thinking the space was large enough. When the appraisal came back, however, we could not argue in face of the hard facts. We decided to pull our offer away, one of the best moves we made. This particular home is still on the market, several months later. The seller made a last attempt to draw us back, he lowered the price several thousand dollars. We felt that it was too little too late and decided to move on. I highly encourage you to customize your offer letters with language that protects you in situations like this, it will save you thousands and ensure you end up in the dream home that is ideal for your needs.

The next installment in our home buying journey: how we almost rushed into buying the wrong house. We're getting closer to the end of our journey but still a few offers which did not work out.

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