Dear Heather: We recently put an offer in on a cottage that was on the market for $550,000. Our offer was $525,000 which was accepted, and was subject to financing from the bank.

When the bank appraised it the appraisal came back at $475,000. We are shocked! We don’t have the extra $50,000 in cash available to us. Now what do we do? — Trying to Buy

Dear Trying to Buy: You’ve found your dream home. The asking price is $550,000 — an amount you’ve already been preapproved for by your bank. But is the home really worth that amount? That’s the question at the heart of the home appraisal. The worth, or value of the property, will determine how much a lender is willing to give you to buy that particular piece of real estate.

This all-important step in getting the financing you need is the home appraisal — an oftentimes confusing part of the mortgage process in which both buyer and seller must depend on the expert opinion of a stranger. A real estate appraisal is simply that, the expert opinion of a certified, licensed professional who determines the value of a piece of property. If your $550,000 dream home is really only worth $475,000 then unfortunately in the eyes of your lender the home is overpriced.

A home appraisal also protects the bank from lending against a property that’s worth less than they’ve invested. And it protects you from paying too much for a house simply because it was love at first sight. The home appraisal is a no-nonsense factor in a decision that is often emotional for the buyer. But if you do get a low appraisal, what happens next?

There are two primary appraisal methods for residential property. In the sales comparison approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables, or comps. The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.

The cost approach is used more for new property and is based on rebuild costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property’s worth.

Now you learn that your dream home is valued at $475,000 — a full $75,000 lower than the asking price! Your lender won’t loan more than the appraisal. So what do you do?

From the lender’s standpoint, the mortgage transaction is at a standstill until something else happens. Perhaps the seller will lower the agreed price, or, as the homebuyer, you may be willing to increase your cash-down payment. It’s possible that both buyer and seller can negotiate compromises that will satisfy the lender. If, however, negotiations fall through and the appraisal is still too far below what the bank is willing to finance, then there’s no choice but to cancel the transaction. You probably signed a purchasing contract stating your offer for the property, but it likely contains a loan contingency. This is a statement that allows you to cancel the contract and receive any deposit you paid the seller if you can’t qualify to buy the property at the agreed terms.

A home appraisal is more than just another cost added to the buyer’s bottom line. It’s a protection for everyone involved in the home-buying process. It will help you make a more informed decision about purchasing a home. In today’s market it may not be wise to pay too much more than the appraised value, there are many good ‘buys’ to be had, and there’s bound to be something else out there that you’ll fall in love with.

Happy house hunting!

Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for 25 years. If you have a question for Heather, please contact her at hchilvers@brcl.bm or 332-1793. All questions will be answered confidentially.