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Getting the Most out of your Home Appraisal is essential when answering the question, “How much my house is worth now “. So, you’ve put your house on the market, a buyer has come through and made an offer. You listed the house at $625,000, the buyer offered $565,000, so you settled on $599,000. The buyer’s pre-approval letter authorized mortgages up to $900,000, so you’re feeling pretty good about the whole situation.
Then, about 10 days before closing, the whole deal heads into the toilet, because of a process that neither one of you thought of — the bank’s appraisal. That value comes back low, as the appraisal values the house at $540,000. The buyer had been planning a down payment of $50,000 and taking out a high-ratio loan, so even with the down payment, the value of the house is worth less, according to the bank, than what the principal of the mortgage would be.
This happens more frequently than you might think. As the seller, you’ve already come down almost 5 percent — $30,000 — on the price of the house. The buyer has already maxed out his available liquidity for a down payment, or he doesn’t want to come up with any more cash. For whatever reason, the deal is now dead on arrival.
Why do short appraisals like this happen? They are typical in a house market that is either declining or in a great deal of flux, particularly when there aren’t a lot of “comps,” or comparable real estate transactions, for the appraiser to look at. This lack of recent precedent makes it difficult for home appraisers to figure out what the current market value actually is. In a market where short sales and foreclosures are taking place, this puts another drag on property values for homes that are not in trouble with the banks.
Another issue has to do with the use of appraisal management companies. While these companies have a lot of appraisers working for them, many of them have little training and even less familiarity with the community in which the appraisal takes place. With as many as one in eight potential real estate contracts experiencing cancellations in 2013 because of low appraisals — up from single-digit percentages in prior years — this is becoming a real problem.
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So what can you do to get an appraisal which is a fairer expression of the value of your home? That low appraisal isn’t just going to affect this one contract — after it happens, every subsequent potential buyer looking for a loan has to use that appraisal with the bank, and the end result is that no one will be able to get financing on the price that you want. Unlike government appraisals for property tax purposes, there is no appeal process.
If you’re a seller, get your own appraisal done before you list your house. Talk to your realtor about a qualified appraiser who has a reputation for fairness and for recognizing the full value of a home. Then, set the list price for your home based on the outcome of that appraisal. You might not get the number that you like, but at least you’re avoiding unpleasant surprises right before you go to closing, and you’ll have your own appraisal to combat what the buyer’s bank comes back with.
In fact, when the buyer’s appraiser shows up, give a copy of that appraisal to him. If he’s a professional, he won’t get offended; he’ll realize that you’re just trying to provide him with as much information as possible. Also, when a low appraisal comes back, don’t be afraid to question it with the appraiser or his supervisor. While there is no formal appeal process, having that first appraisal in your pocket gives you a lot more credibility, and you may find that the buyer’s appraiser changes his tune after being questioned.
If you’re a buyer, remember that you don’t want a lowball appraisal, because it might affect your ability to get financing — and it definitely could torpedo your deal. Tell the lender to find a local appraiser, rather than a representative of a management company based somewhere far off. Ask for an appraiser with professional certifications. Show up with the appraiser and share any documentation you have of local foreclosures or short sales that could be pulling the comps down. A lot of them just grab information from the MLS files or from courthouse deeds, rather than finding out the reasons behind the prices. Professionals will be glad to have this perspective.
If you have any more questions about the appraisal process, give one of our mortgage specialists at Amansad Financial a call. We help our clients get the very best deal possible, and we look forward to helping you.