Appraisal Issues

With the prices rising in almost every market around the country, appraisal issues are more of an issue than ever. Most homebuyers are uneducated or confused about what an appraisal is and how it affects the home buying process. As an agent, it’s my job to help both buyers and sellers negotiate this process. This is what I know to be true:

Market price, or market value, is determined when a seller and a buyer who aren’t under duress negotiate and agree on a contract price for the sale of a property. If the buyer doesn’t need a lender, then that’s it. That’s the market price. In most cases, an appraisal isn’t done at that point, because the buyer and seller agree on the value of the property.

If the buyer does need a lender, as most do, then the bank has to have a way to document the market value. That’s where the appraisal comes in. An appraisal is one person’s opinion of what a mortgage lender should be prepared to lend on a particular property, based on the recent history of sales of similar properties. Unfortunately, the process is not great at taking into account things like low inventory, pending sales, and asking prices for unsold homes. And in this environment of rising values, those things are more important than ever when buyers and sellers are negotiating.

What can you do if you have an appraisal issue?

1.       The lender can file an appeal with the appraisal company. That means the parties submit additional information and request that the appraiser reconsider. Appraisers are human too and sometimes miss something or make a mistake just like everyone else.

2.       The buyer and seller can agree to lower the price. Naturally, the seller doesn’t want to do that because everyone has already agreed on what the market value of the property is. If the appraiser was conservative in his or her calculations, the seller may take their chances with a new buyer and a new appraiser.

3.       The buyer can come up with additional cash and pay the difference at the closing table. If the buyer got the house in a multiple offer situation and knew that the house might not appraise for the contract price, the buyer should be prepared for that possibility. If they seller is in an equity position, it may be possible to negotiate a seller loan for the balance.

4.       The buyer can walk away and get their earnest money back. The contract should have an appraisal contingency, and if the buyer is getting an FHA loan, that appraisal contingency covers the buyer all the way to closing regardless of any other terms in the contract. If the house doesn’t appraise, the buyer gets their earnest money back. But they still lose the money they have invested in inspections and the cost of the appraisal itself.

There isn’t any way for everyone to be happy once you have an appraisal issue! Buyers feel like they are over paying and sellers feel like they aren’t getting a fair price for the house. The best way to handle an appraisal issue is to avoid one! The seller’s agent should meet the appraiser at the property and be prepared to support the contract price for them. AND BE NICE!!! Buyer’s agents need to be particularly wary in cases where the homes in a neighborhood haven’t been selling where they ought to because of foreclosures and short sales. And both buyers and sellers need to be realistic about home values.