Plan For Appraisal Issues
An appraisal is supposed to be an estimate of “fair market value”, right? Well, in the local market it seems there are many different ideas of what really is fair market value. Unfortunately, when a lender’s appraiser has a much more conservative opinion, it can sometimes ruin a real estate deal.
Last year I sold a home that had more than half a dozen full price offers. We priced it right, but still waited with apprehension for the appraisal to come in to the buyer’s lender. Why the concern? Because the appraiser does not consider how many people tried to buy the property - instead, recent actual sales of comparable properties are used. Some appraisers are much more conservative in how they select and adjust these “comps”, and (you heard it here…) can sometimes appraise a property at a value that does not truly reflect market value.
Since lenders base their loan decisions on the appraised value, they will reduce a loan if an appraisal comes in low. This can easily kill a deal if the buyer can’t or won’t cover the difference. Few sellers are willing to reduce a price just because of an appraisal, especially if they had multiple offers. In fact, by the time an appraisal is issued, the value of a property may have increased even more… giving the seller an option to simply put the property back on the market at a higher price if the buyer can’t conclude the purchase. Doesn’t that say something about the original appraisal?!
These low appraisals are fine for the lender - they protect the lender by ensuring the mortgage collateral is not overvalued. But they are really bad for buyers and sellers. Usually, the buyer really wants the property, and is in a better position to understand how good a deal the contract price is - after all, the buyer has a choice of all the other properties on the market!
Appraisal is an art, not a science. You can easily get five different appraisal values from five different appraisers. And I know how difficult it is to determine market value in a rapidly changing market. But I think that the number of deals being killed by low appraisals has increased, and this is an indication that something needs to be done to improve appraisal accuracy. In the meantime, buyers and sellers alike should be aware of the issue and plan for the possibility of a low appraisal.
Tags: appraisals