Now its not enough to find a house, beat out multiple offers to win the house, and get through repairs. After all that, we are all — buyers and sellers and agents — hoping and praying the house will appraise for the purchase price. It may or it may not. It’s a crap shoot.
Back in the Good Old Days before the recession, houses always appraised and nobody worried. The definition of Market Value is “the price that a ready, willing, and able buyer would pay for the property.” Well, a number on a signed Offer to Purchase means that a ready, willing, and able buyer is ready to pay that price, so that price is obviously Market Value. Done!
Then came the housing bubble and the recession, and the appraisers’ mandate has changed. Now they are required to calculate conservatively, sticking closely to the previous sales. My first three sales this year did not appraise. One buyer was under contract for $346,500; the house appraised for $328,000. Another one was under contract for $450,000; the house appraised for $422,000. Yikes!
An appraisal is nothing but an opinion — a professional opinion, but an opinion nonetheless. However, lenders treat appraisals like facts. They will loan the agreed-upon percentage of either the purchase price or the appraised value, whichever is lower. And a second appraisal is not allowed.
So what happens when a house doesn’t appraise? Depending on the personality and the financial means of the buyers and sellers, it can play out in one of four ways:
1. The buyer brings more cash and makes up the difference.
2. The seller lowers the price to match the appraised value.
3. Buyer and seller split the difference — maybe not 50/50 but they both take a hit.
4. The deal falls apart.
I’ve had all four of those resolutions happen. Some variation of number three is the most common, but that doesn’t mean we get there without drama and angst.
Inventory is short, which means the Law of Supply and Demand would push prices up more quickly if appraisers weren’t holding them down. Still, every time a house sells and closes above appraised value, that creates a new comp that will help the next home in that subdivision to appraise for more. So appreciation is happening, just more slowly. That’s good in a way — nobody wants another bubble.
But it’s tough on sellers who want the best price, and on buyers who need to get a loan.
