Price. In the current soft real estate market, everything boils down to establishing the right price. Fair market value. Miss the mark and you’ll exclude likely buyers who would have otherwise looked at, and possibly written an offer on your home. Many sellers want to ‘nudge’ or pad the value by as much as 1%-2%. Even in a soft market it’s possible, although not likely, to find a buyer who is willing to pay a ‘padded’ asking price.
In Fairbanks 85% of home buyers finance their home purchase. Unless your buyer is one of the 15% who doesn’t plan to finance their purchase, a property appraisal will be ordered by the lender. Appraisals are used to verify that the property value is sufficient to cover the loan amount in the even the buyers default. Appraisals are simple an individuals opinion of value of the property at that specific moment in time. Query a dozen different appraisers and you’ll likely receive at least as many opinions as to a property’s value. Appraisers review recent comparable sales of homes of similar size, age, amenities and general condition. Adjustments are then made to each comparable property to make it more closely resemble the property being sold.
Since lenders base their loan ratios off the property appraisal, a low appraisal can create issues for everyone involved. If an appraisal comes in low, most appraisers will call to find out what comparable sales were used in establishing the asking price. If they haven’t used them in the analysis, and they deem them to be comparable properties, the appraiser will include them and reevaluate the final adjusted value. If the appraised value doesn’t meet the sales price there are a couple of options:
• Provide the comparable sales to the lenders underwriter for an internal review. If the underwriter feels the appraiser is off the mark, they have the ability (in Alaska) to adjust the appraised value by as much as 3%.
• Request that another appraiser review the appraisal and adjustments.
• Order a new appraisal; it could be worth the $500 appraisal fee. (not an option on VA guaranteed loans)
If the appraiser can’t meet the sales price and the underwriter won’t adjust the value, sellers are left with few options:
• Have the buyer pay the difference between the apprised value and the sales price.
• Reduce the sales price to the appraised value.
In the end, if the buyer and seller can’t find common ground with respect to the sales price, the purchase contract becomes null and void and, unless the appraisal contingency was waived, the buyer is entitled to a refund of their earnest money deposit. The seller is then free to remarket the property. Sellers would be well advised to take the emotional attachment to the property out of the equation and rationally evaluate their options before automatically dismissing a buyer and a low appraisal.
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Hello Jesse -
Interesting perspective. I must admit I cringe each time I hear the term 'appraisal coming in low'. Assuming the appraiser (and now often underwriter) is educated and ethical the term 'coming in low' should be replaced with 'it is what it is'. I understand that the buyer and seller might both be content with the possibly inflated sales value (especially when there's $10,000 in closing costs paid to buyer), but the bank simply wants to be sure that their assets are covered and appraisers are hired to do that.
Its good to see other RE professionals opinions. Thank you. Your post has been added here.