Don't let an appraisal stymie your home sale
Here's what sellers and buyers can do if a home is valued lower than the price they agreed upon in a contract.
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I am selling my home and buying another. Purchase agreements have been hammered out, inspections have been done and issues that were uncovered are being addressed, and the closing date has been set. There's just one last hurdle we have to clear before I'm ready to say with certainty that we are moving: the appraisal.
Over the past three months, real-estate appraisals have held back more than one-third of home sales, according to a survey by the National Association of Realtors. Of the real-estate agents surveyed, 9% said a contract was delayed because an appraisal came in below the negotiated price, 15% said a contract was renegotiated to a lower price, and 11% said a contract was canceled as a result of a low valuation. (Bing: How long does the average closing take?)
A low valuation can scuttle a deal if the buyers are relying on financing from a bank to purchase a home. Banks require appraisals to verify that a home's sale price is supported by its market value and won't issue a loan for more than the appraised value. However, there are several things buyers and sellers can do if an appraisal is lower than the price they agreed on, says Walter Molony, a spokesman for the National Association of Realtors. "You don't have to sit there and silently take what happens," he says.
Look for errors in the appraisal report that might have led to a low valuation. Make sure the appraiser recorded the correct square footage of the property, the right number of rooms and any upgrades that might boost the value of your home.
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Ask the appraiser to reconsider his or her evaluation if you think it does not accurately reflect the value of your property. For example, the appraiser might have used short sales and foreclosures when making comparisons for valuation purposes, and the low prices of these properties could have hurt your home's appraisal.
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Ask for a second appraisal, especially if the first one was done by an out-of-town appraiser who wasn't familiar with the market.
Pay for your own appraisal and, if the valuation is higher, use it to contest the first appraisal. To find a certified appraiser, visit the Appraisal Institute's website.
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Try to renegotiate the price if you don't have the cash to cover the difference between what the bank is willing to lend and the negotiated price.
Ask for another appraisal if the seller won't agree to a lower price. Ask the new appraiser not to include any foreclosures or short sales in his list of comparable properties.
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Cancel the contract if it was contingent upon your ability to secure a mortgage and if you aren't able to get a mortgage for the agreed-upon percentage of the purchase price because of the low valuation.
I don’t believe I’ve ever seen an article on Real Estate Appraisals that was so incorrect. The writer is telling buyers to get the Appraiser to do things that will cause the Appraiser to lose their license, fined up to a thousand dollars and spend a year in prison. This writer knows nothing about the Appraisal process. Everything the Appraiser does has to be backup by public records and in according to a course of action set by Congress. There is no benefit for the appraiser to ever come in low on a property. The Appraiser is the only one in the sales transaction who doesn’t have a money motive because their fee is the same no matter what the market price is. All others are paid according to the closed sales amount. The higher it is, the more they get paid.
The value of a home is bases on the principle of substitution which simply means, The Appraiser inspects the subject home and determines the size, location, age and condition. They then look for comparable homes closed within a certain area around the subject location and do an exterior inspection from the street of each to determine if they are close enough to the size, location, condition, design and age to the subject to use as a comp. Three closed sales is the minimum number. The closer to the subject location the better. They then use the closed sale prices to arrive at a value of the subject. To put in simpler terms, You go to a new car dealer to buy a car. You work out a price for the purchase of $20,000 but before you buy, you check out the price at three other dealers and find each having the same car in color, equipment and everything else exactly as the one you are buying except for one thing. You can buy any of the other three new cars for $15,000. Is the one you want to buy still worth $20,000? If you think so, I have some ocean front property for you in Nebraska. If you paid $20,000 for the car, you would be $5,000 underwater and the same goes for buying a home for more than the Appraised Market Value. One has to understand, the Appraiser is not your enemy because they protect the buyer from paying more than the house is worth, keeps them from being underwater and keeps the lender from making a loan for more than it‘s worth. If the buyer wants to pay the higher price, there is nothing that keeps them from doing so but the amount over the loan amount has to be cash.
Certified Residential Appraiser
Owner of Morgan Appraisal Service
My home was apprised at 140,000, a fair appraisal based on the most recent homes for sale in my area and the upgrades we had done to the property. Even though we remodeled our whole house from the wiring to the roof when the lender seen the appraisal they asked for it to be reduced 10,000., because of the age of our home. Our home was built in 1957 and the rest of the homes in our area mostly are from the late 70's or early 80's. Because our house was compared with homes much newer (although not as updated) the lender said it could not compete. Can the lender do this, the appraiser obviously took into the fact that the whole house had been remodeled, it was their appraiser after all.
Frustrated in CA.
I am an appraiser... I've been doing it 14 years. I cut sale prices all the time. Not because I want to ruin a deal... but because I don't feel the value is supported based upon my analysis of what has recently sold in the immediate area. I've spoken to many a borrower who have thanked me for not just hitting a number (the sale price)... and have saved buyers thousands upon thousands of dollars. Some of them tens of thousands of dollars.
What I don't understand is why everyone gets down on the appraiser when a deal falls through. Why doesn't anyone seem to get upset with the buyers agent for putting them in a deal that can't be supported. I mean isn't it the buyers agent who is supposed to represent the buyer and negotiate a fair price? It's no secret buyers agents are paid a commissions and the more you pay the more they make. I've even been told by buyers that their agent told them to bring in a "high" offer and that the appraiser would cut the value, then they could use the appraisal to renegotiate!! Seriously?
I'm real sorry if not every deal I work on goes through.... but I sleep well knowing that I save people just as much if not more money than I cost them.
If homes in your area sell for (example) between $100k & $125k depending on the model & how remodeled/updated it is, the appraiser cannot value your property at $150k no matter how much money you sink into it. Condos are especially prone to a cap because they are in the same or similar complexes with same or similar floor plans & builders and have a range of prices they sold for, no appraiser is going to claim that your property is worth 20% more than any sale previously. All sales are required to be within 6 months of the date of the appraisal, not from pre-recession eras. Additionally the comparables used are generally the highest & best sales they can get their hands on because believe it or not the lender wants to do the deal & the appraiser doesn't want to lose jobs with the lender for coming in too low. The appraiser is required to find comps that bracket the subject in size, condition & sales price. He can't show comparables that all sold in a certain range & say the subject is worth more considerably more based on 'improvements'. He has to show that within 6 months, something similar sold for at least the same amount. Mostly they can't do 'fantasy' appraisals. Not that I haven't seen some, esp back in the day when they were funding everything, when they shouldn't have, which is why we are in this mess in the 1st place. I am surprised when people who don't know the business make comments based on emotion & not facts & proven area sales. Also where I live it costs WAY too much for any work to be done on a home, to the point where you would never recoup most of the cost when you actually sell.
Mr. Music Director, the idea of something being worth what someone is willng to pay for it works great with cash. In rela estate, most of the time, you're not buying with cash so you aren't really willing to "pay" for something. You're willing to borrow money to pay for a house. the person lending you the money wants to know the house is worth at least as much as you want to borrow.
Sluggo- what you appraised for in 2007 is not relevant today.
An appraiser can reconsider his or her estimated value. You can ask, especially if you have information the the appraiser may not have had when the appraisal was comleted. 9 out of 10 times you don't have any information the appraiser hasn't already considered.
In regards to the article, I (for the most part) would never consider a foreclosure or distressed sale as a comparable in a typical arms-lenght transaction.
Property Appraisals... Alas, there's little transparency and a lot of smoke, mirrors, and skull-duggery. Consider that I built a custom house in a "better" area in south-central KY in 2003. 2600 sf, cathedral ceilings, tile, ash and hickory floors, post & beam construction, loft, stone fireplace, window-walls, skylights, Pella windows, cedar siding, daylight basement with stone walls, built to tornado - proof standards, oversized double garages, hi-efficiency heating and AC, all perched on a hill-side with fantastic never-to-be-blocked all-season views and privacy but easy commute to towns. Served as my own GC, built by the Amish, etc. etc. Cost around 165K all-up with 50-yard paved driveway (and I thought it a whopping BARGAIN at that price!). Other homes in the sub-d and near areas all appraised within preceding 2 - 3 years at over 80/sf... and many well over that. I'm a fed - had to relocate to another state for the job in 2006... gov contracted a reloc company to move me. They obtained the needed 3 appraisals... HIGHEST came in at 139k (about 51/sf!) Did a detailed home search of ALL real-estate listings in both that county and 4 adjacent... of 1391 listings for sale, only 5 came in at less then 51/sf for a complete house on any piece of land over 0.3 acre! Imagine that! If someone could have persuaded me to sell at or near the prevailing appraisals, they could have purchased a high-end custom view home for less then almost ANY plain-jane worker's shack in the lower part of KY! Turned out that the reloc company actually used 3 of their "own" appraisors - none of whom had any familiarity with KY, let alone the area I was in! I finally had to get my own - appraised for 239K and up... Hmmm. Even when the local market was suffering a down-turn. Maybe this appraisal scene had something to do with the fact that my house was being handled under what was called "a guaranteed home-sales contract" for gov employees and other such victims in transfer...
I'm a believer in 1) doing my homework when I buy and when I sell, and 2) it's worth exactly what an aware and educated someone is willing to pay for it. The role of the appraiso in the sale is to work for the mortgage lender - not for either the buyer or the seller. Be aware of their interest, as it influences greatly what they do and say. YOU can find out what other properties like yours in your area sell for, and use that information ("comps" in the R-E world) in pricing your home. I'm about to sell my house with pool... anyone who comes buy and offers will need to understand that it will matter not to me if he/she wants to claim that pool is actually "really more of a maintenance burden than any sort of nice feature"... IF you want this house, it comes with this pool - and you need to want BOTH. IF you want a house without a custom pool - well, there's lots of them around - go buy one!
Seller and buyer determine the Fair Market Value in reality. However the banks don't see it that way. They usually have a few appraisers on retainership that get the "low ball them all" pressure from the banker. I can see why after the 2007 and onward fiasco. Even so the "Golden Rule" concerning banks is "He who has the gold, makes the rules.
Off the record and off the HUD closing docs, the buyer and seller can work out the difference. For example the appraisal comes in low and the seller doesn't want to let it go too cheaply, he can perhaps get the buyer to sell his Harley or motorhome to him, say $10,000 worth for a hundred bucks or so. The possibilities are endless.
Used to be the seller could carry the difference in a second mortgage, and some small banks may still allow it if they know and trust the borrower. As long as the buyers credit and debt-to-income ratio is good they really shouldn't care because they're in 1st position anyway. A private lender will be much easier to deal with also, and just skip the banker altogether.
Noncom ~ That depends on what information is being used to get the appraiser to reconsider. If no information is given, but the interested parties are just asking for the appraisal to be bumped then if the appraiser does so they will probably be in violation of USPAP.
On the other hand, if Mr. "Architecture Buff" below becomes aware of condo units in his project that have sold after being remodeled and the appraiser did not use those comparables, asking him to reconsider based on more relevant data is reasonable.
What the appraiser should be after is simply the truth. If better data is available and the appraiser did not have or find that information (whether or not he SHOULD have found it is another discussion), then an appraiser should be willing to reconsider a value estimate, as long as he does so in the interest of reporting a TRUE value estimate.
Asking for a "reconsideration" of value from the appraiser is the same as asking them to violate government rules. USPAP was revised with specific opinions given to circumvent this once often-used bullying tactic to wrench up appraised values.
This article is the typical kind of ill-informed information we get from the media, that crystallizes incorrect misperceptions in the minds of the consumers, who then become combative when they can't control their real estate transactions.
The honest appraisers have all been run out of business anyway, the lawsuits related to the coercion that was partially responsible for the financial collapse were all dismissed with prejudice, burying the issue and letting the bankers off scot-free. By all accounts, the speculation is setting up to reoccur, the structural problems related to a lack of regulation were never addressed after the financial meltdown of 2008. Housing bubble #2 will soon arrive. Welcome to your future, America!
I bought a foreclosure and then sunk more than $50, 000 worth of upgrades into it to bring it into this decade. (The property had not been touched since 1979!) I then tried to refinance my home and was told it wasn't worth a dime more than a "comparable" property that was in my condo complex that had NO renovations done! What? How can that be? Let's see, a new kitchen and two new baths aren't worth anything???
If appraisals are supposed to be based on "fair market value" i.e., what a willing buyer is willing to pay a willing seller, then the lowball appraisal is interfering with a negotiated contract. I think these lowball appraisals are the industry's way of protecting the banks at the expense of the homeowners.
I think someone needs to sue the appraisers when they have a contract for a sale in which the buyer has financing in place for the agreed upon sale price and the appraisal kills the deal.
In 2007 our modest 1,000 sq. ft. home appraised at $120,000 against a home improvement loan.
Fast forward to 2012. I try to take advantage of low interest rates and decide to re-finance this loan...
The appraisel comes back at $70,000, after we had done $50,000 in improvements. Apparently granite counter tops, solid wood cabinets, hardwood/tile floors, paint, fixtures, new windows, doors and stucco just don't add value to a home like you would think.
P.S. The person performing the appraisel took about 15 minutes, most of which was measuring.
Thanks for the insult.
This, coercing, threatening with blacklisting, non payment for services and demanding that appraisers raise value estimates, demanding that a reconsideration take place, unknowledgeable buyers/sellers/real estate heifers raising hell and making demands, etc., is a big part of what caused the meltdown in 2008. Appraisals and the appraisal process are simply too complex for the average real estate moron or buyers, sellers or marginally trained real estate agents to get in to. Try to coerce a real estate appraiser today and expect to have your name reported to the state and feds. The old days of artificially raising value and risking one's career and life just to suit you because your deal is so damned special are over.
Any appraiser worth his salt knows how to do things right and doesn't need any advice from people half his age, IQ and education. If you get an idiot, it's because your lender is too cheap to hire a competent appraiser. Appraisers typically aren't going to utilize foreclosures, short sales, etc., as comparables unless they are relevant to and or pervasive in the market. Regardless of what anyone thinks, these types of sales must still be considered whether utilized or not. Regardless, if you think you've been slighted, stay civilized, most appraisers will reconsider their findings, but when you demand such, it's just as likely that your valuation will stay the same or even possibly go down. It is illegal for an appraiser to select market data based on a preconceived notion of value, that is, just to push your value estimate up.