What Happens if my House Doesn’t Appraise for the Full Price?
This is a very common question I hear a lot from sellers and buyers too. So here is the situation. The offer comes in for the full price and the seller is happy and accepts it. The escrow company begins their job and the agents get all the disclosures ready for signatures. The home inspection is completed by the buyers and everything is proceeding smoothly. Then the mortgage lender sends the appraiser out…….and this is where things get shaky.
How did the seller’s agent come up with the selling price? First the agent went through the subject home and looked at the entire place; inside and out and considered any upgrades, necessary repairs, the entire appearance, the neighborhood and the location. Then the agent looks at all the homes that have sold within a ½ mile radius if possible or out to 1 mile if none closer. If there are several comps, the agent will consider if they are better, less or equal to the subject home. The agent will then look at homes in the same area that are for sale to see what price they are selling for. A home for sale is not always a good comp as it can just be overpriced and not reflective of the true marketable price. At the listing appointment, your agent will give you this information and a suitable price is arrived at. This will be your asking price.
How does the appraiser come up with the selling price? Now, the appraiser comes out after the home is in escrow and takes pictures, measures the home and the lot, considers remodeling upgrades and also looks at the neighborhood and the location. Appraisers strongly consider sold comps in the area as well but the entire process is much more scientific. Appraisers go to school to get certified and use software to assist by plugging in numbers and it is a more calculated process. When this process is all done, the appraiser presents a 25-30 page report. This report considers nearby sold homes within the past 3 months, pending sales, and listed homes (actives).
Other factors the appraiser considers. They consider what type of loan the buyer is getting. The reason is that each loan has its own requirements for approving and funding the loan. A Conventional loan tends to get approved with few repairs or none. FHA and VA loans have stricter regulations so there are typically some repairs required.
So let us consider that the price comes in less. There are 3-4 options here: 1) Reduce the selling price to the appraised price 2) Appeal the appraisal 3) Cancel the contract.
The first option is the easiest one; reduce the selling price to the appraised price and proceed and close the contract. But the seller may not be willing to do this and if this is the case, option 2 or 3 can apply.
The second option is that the appraisal can be appealed but you must have strong facts, sometimes there is a $150 fee and it has to be paid up front, and no one can be sure the appraiser will change their price after reviewing the facts. I have known of at least 10 appeals and only once did the appraiser agree to change the price.
Third option is for the seller to cancel the contract and either hope for a new buyer or will decide not to sell and remove the home off the market. This is where it becomes complicated. If the appraisal was for a FHA loan, this appraised price will stand for 6 months. So if the seller is hoping for a new buyer, it will have to be a Conventional loan only to get his/her full price.
There is a fourth option here sometimes! All monies have to go through escrow so there is no passing money behind the scenes from buyer to seller. But if the buyer really wants the home and the seller will not budge, then sometimes the bank will allow the buyer to pay the extra money to the seller through the escrow company. This has to be approved by the Under Writer who has the final say on approving the loan.
Things to do:
1. Make sure the home looks as nice as possible when the appraiser comes.
2. Prepare a list of any remodeling done, any upgrades and newly purchased appliances. This list can be given to the appraiser by your agent at the time of the appointment.
3. Be sure you have taken care of all repairs necessary and laws can vary from state to state but in California you must: A) Have your water heater double strapped. B) Have smoke detectors in all bedrooms, top of stairs, and downstairs too. 3) Carbon Monoxide detectors are now required; 1 upstairs and 1 downstairs. (Appraisers are looking for these items as they are mandatory so make it easy on yourself and do it prior to inspection)
4. Make sure your perception of your home is accurate. Sometimes a seller thinks they are right about the list price and the Realtor is wrong. Then when the offers and the appraisal come in low, only then the seller understands they were seeing an inflated price.
Summary: Your Realtor is there to assist you through this entire process and can explain in detail what to do and what is occurring. Most of these situations are resolvable and many appraise at full price.
*I had 4 appraisals done in the last four months and two appraised for full price and the other two each came in at $5,000 less than contract price. The reason given for both was the location of the home and this is something we can’t change. Sometimes the appraiser considers factors that we did not and therefore must go along with the report. Usually the seller will agree to change to the reduced price.
This is usually a stressful time and takes 3-5 days for the report. Let your Realtor do the worrying for you and this is when you should start packing.
I sell real estate in Riverside and San Bernardino Counties; Redlands, Loma Linda, Highland, Colton, Yucaipa, San Bernardino and other cites too. If you are looking for a professional and experienced agent, I am just a click away. Google me at Kristin Hamilton-Real Estate Agent. Homeowners and Buyers both will find my services top notch and successful. Call me to sell your home.
I am waiting for your call! 909-557-6966.
This post was authored and or picture was taken by Kristin Hamilton. ©2012, All Rights Reserved, This content may not be reproduced or reprinted (Except for ActiveRain Re-blogging) without express written permission of Kristin Hamilton, Keller Williams Realty, Redlands, CA.