Recently, the question of when to order the appraisal has caused problems for us on two deals, so I thought I would address it here.
Just so everyone is clear on what we’re talking about: When you use a loan to buy a building, the bank requires an appraisal be conducted. Depending on the size of the deal, the appraisal will cost anywhere from $800 all the way up into the low, single digit thousands.
There is a temptation for the buyer to put off ordering the appraisal. After all, she wants to do her inspections, find out if there is anything wrong, and then figure out if the relevant problems can / will be addressed by the seller before going ahead and risking the money for the appraisal.
But giving in to this temptation is a major mistake.
Here’s why: The whole aim of a well-conducted contingency period is to get the buyer into position to buy the building as quickly as possible. When I say “into position”, I mean “in possession of all of the relevant information regarding the property, including the physical condition, the tenancies, (critically) whether the bank will make the loan necessary to close”.
Once the buyer is in position to buy the building, it’s pretty easy to work out a deal between buyer and seller to address any issues with the property. The reason it’s easy is that the buyer can say “Buyer hereby agrees to remove all contingencies (and move forward with the deal), conditional upon Seller agreeing X”. This is a great position to be in, because the Seller’s broker can really lean on the Seller to accept, knowing that, if she does, the deal is done.
How does this relate to the appraisal issue? Well, the longer the Buyer waits to order the appraisal, the more time it takes for the Buyer to get in position to move forward with the deal. During that time, the Seller is, quite understandably, getting antsy… Did something come up on the inspections? Have they decided to buy something else? Are they planning some insane price chip? The longer this goes on, the more trust is lost and the harder it is to negotiate any credits necessary to make the deal palatable to the Buyer (eg the “X” in the above example).
So, here’s the deal: When you’re buying with a loan, inspect the property on day 1 of the contingency period. Assuming there are no obvious, huge, horrible red flags, order the appraisal immediately thereafter.
Yes, there is a chance you’ll have wasted that money. But the more likely scenario is that, because you will be in a position to remove contingencies sooner, you will be in a much better position to negotiate the removal of contingencies, where the amount of money at stake make the $800 appraisal fee look like peanuts.