Cash Buyers Need Appraisals Too

J Philip Faranda March 4, 2010

One misconception regarding the desirability of cash buyers is that because there is no mortgage, no appraisal is needed. Anyone who has ever done a few cash transactions, however, knows that people who are writing a check often do as much or more due diligence than a lender. They have a right; it is their money. 

In 2006, when there was still plenty of irrational exuberance in the market, I had a cash buyer check for mineral rights prior to closing, much to the consternation of the seller. It still closed in 30 days, which is a heartbeat for New York, but those 30 days were intense. Even after 10 years in the business I felt as if I were being schooled firsthand in due diligence. 

While mineral rights are a stretch, an appraisal is not. The purpose for a lender appraisal is to ensure that the collateral they are loaning money on is worth what the terms dictate; an 80% “loan to value” mortgage of $400,000 requires a $500,000 home. Problems arise when that $500,000 home appraises for $475,000, knocking the ratios off kilter and causing a dilemma between buyer and seller. While this is unfortunate, the lender has to protect their interests. They are loaning the money.

So it goes with the cash buyer. There is no government program, no mortgage insurance, and no safety net if they misjudge the value. On several occasions, I have had cash clients buy unique homes which did not have many easy or obvious comparable sales. In each occasion, the homes were over-improved: phenomenal kitchens, amazing staging, knockout landscaping and other bells and whistles which obscured the fact that, hey, this is still a raised ranch, just with a $50,000 kitchen. Having an objective, unbiased 3rd party give a dispassionate, market activity based assessment of value brings a cooler head to the table than a proud, heavily invested seller and a buyer with stars in their eyes. 

If the appraisal indicates that the value is in line with similar homes, fine. If the appraised value is higher than the purchase price, mazel tov. If, however, the appraisal indicates a value lower than the purchase price, it is a sobering moment for all parties. The buyer is certainly not going to want to pay more than that number in all but rare cases. The seller has to grasp that they are selling real estate, not chattel. The key word is location location location, not viking stove viking stove viking stove, or finished basement finished basement finished basement. Should the seller “eat” the difference? Consider this; if they rebuff the cash buyer, the next buyer is probably getting a mortgage. Since mortgages require appraisals, history will repeat itself. 

In cases where a cash buyer’s appraisal comes in low, the seller should get their own appraisal to ensure that the buyer’s report is accurate. They then need to weigh their options, and, often, those options include renegotiating price to bring the real estate they are selling in line with the current market. . 

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