How Low Appraisals Affect the Market & What You Can Do About It
As anyone whose home appraisal has been lower than expected can attest, low valuations are causing friction in the housing market.
A recent survey of more than 3,000 members of the National Association of Realtors (NAR) found that 11 percent had a contract canceled because an appraised value came in below the price negotiated between the buyer and the seller, 9 percent said a contract was delayed by a low appraisal, and 15 percent said a contact was renegotiated to a lower sales price as a result of a low valuation.
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Are Low Appraisals Holding Back Home Sales?
Low appraisals, NAR chief economist Lawrence Yun claims, are holding back home sales.
“Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion and in some cases are preventing them from buying at all,” Yun said in a statement.
Among the problems real estate agents say they have encountered are:
- Some appraisers are using foreclosures, short sales, and run-down properties as comparable homes, and are not making adjustments for market conditions or the condition of the property.
- Appraised values do not reflect market conditions such as rising prices, the presence of multi-bidding, and low inventory.
- Appraised values are very inconsistent and fluctuate widely.
- Out-of-town appraisers, who are not familiar with the area or local market conditions, are being used.
- Turn-around time by both appraisers and banks is slow, which delays closings.
“One thing to keep in mind is that the goal of an appraisal report is to help the lender make a wise lending decision,” said Ken Chitester, director of communications for the Appraisal Institute. “It is not intended to confirm a sales price of a home. If an appraisal comes in less than a contract price, it doesn’t mean it’s wrong…. Different appraisers can and do come up with different values. The question becomes how well supported is that opinion of value, how thorough was the research, how thoughtful was the analysis, was the correct methodology applied.
“It’s important to realize the appraiser’s client is the lender and not the buyer or the seller.”
What You Can Do When You Get a Low Appraisal
Preventing a Low Appraisal
There are a few steps that sellers can take to prevent an inappropriately low appraisal.
- Inform the appraiser about the area – Because of the new third-party rules, the appraiser who is assigning a value to your home may not be from the immediate area. It can help to inform that person of the quality of the school district or the amenities in the local neighborhood, as well as improvements to the property as compared with other recent sales in the area. Your real estate agent should also prepare a list of comps or market sales analysis.
- Provide information about the home – Preparing a package of information for the appraiser on your home that includes the plat or condo documents, while also including data on comparable houses, and any improvements you’ve made that should influence the value of your home can be incredibly valuable to an appraiser and help him or her make a more accurate assessment.
- Rely on the expertise of your real estate agent – Good appraisers recognize the expertise of real estate agents in knowing whether one house in the neighborhood has a bumped-out dining room or a certain apartment in a condominium complex has a kitchen upgrade. Often, appraisers will call the listing agent for the home and ask if there is anything they don’t know about the property that will aid their appraisal.
Options When Your Appraisal Is Low
Despite all the best efforts of the agents involved, sometimes an appraisal will come in low. At that point, the buyer has four options:
- Negotiate a lower sales price.
- Dispute the appraisal with the original lender.
- Get a fresh appraisal with a new lender.
- Make up the difference in the mortgage amount from savings.
Lenders’ hands are tied when it comes to the size of a mortgage, which is typically pegged at 80 percent of the property’s value, according to a private mortgage banker with Wells Fargo in Washington. Because the bank always represents the buyer, the lender’s first choice would be to negotiate a lower purchase price.
In this situation, buyers must be careful to avoid letting any appraisal contingency expire, or they’d be locked into the transaction, regardless of the size of the mortgage their bank approves. Generally, sellers will grant an extension of that contingency deadline so there’s time to negotiate or challenge the appraisal. If not, the buyer has the right to walk away from the contract under the appraisal contingency. This is especially important given the longer lead times needed for an appraisal as the market gets busier. If negotiations fail, lenders may be willing to reevaluate the appraisal.
If you’re buying the home, you should certainly ask to see the appraisal report, which is your right. Make sure all the data are correct, such as the total square footage and the number of bedrooms, bathrooms, and garages.
Note whether there are professional designations after the appraiser’s name, or whether two names are listed on the report, which often indicates that the appraisal itself was conducted by a trainee or an appraiser with a bare-bones license.
If negotiations fail and the low appraisal stands, the buyer may be left with no option but to pay the difference—or to walk away under an appraisal contingency in the sales contract.
Source: The Washington Post, washingtonpost.com
Rory S. Coakley is a Certified General appraiser in Maryland, Virginia, and Washington D.C. He is qualified to appraise any type of commercial or residential real property.
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