Tips to Avoid a Low Home Appraisal
If you are considering buying or selling a home in the future, it is
important to know that the appraisal can make a critical difference in
whether the deal actually goes through or not.
For most home buyers and sellers, one particular scenario is becoming
increasingly common. The seller lists the home for $250,000 and the buyer
offers $200,000. After some negotiation, both finally agree on $225,000. The week prior to closing,
the appraisal comes in at $210,000, which is the most that the mortgage
company or bank is willing to lend on the purchase of the home. This
creates a $15,000 shortfall and the question of who is going to make up
the different. Such a shortfall is certainly not a small amount of
money, which is why more and more contracts are falling apart. In such
low home appraisal scenario, the seller is really not able to drop
the price any further and the buyer likely does not have the cash available
to make up the difference either or simply may not be willing to pay more
than the appraised value of the home.
In a declining housing market, short appraisals typically increase due
to a lack of comparable area home sales in the recent past, commonly
referred to as 'comps.' A lack of comps can make it hard for appraisers
to arrive at a current market value. When the sales of homes begin to
slow down, it does not take long for comps to quickly grow old. When you
add in short sales and foreclosure, appraisals become even more
unreliable, which can sometimes threaten a deal even when the buyer and
the seller have previously agreed on a sales price for the home.
The recent addition of the Home Valuation Code of Conduct, also known as
the HVCC, has certainly not helped matters any. Fannie Mae and Freddie
Mac lenders are prohibited by the HVCC from having any direct contact
with appraisers. Instead, most lenders have now chosen to work through
AMCs or appraisal management companies. Consequently, such a pool of
appraisers might have very little familiarity with the geographic area
that is actually being appraised. In some cases, it also means they have
very little training as well, which can cause even more problems.
The National Association of Realtors has recently called the new code
into a question as a result of a recent avalanche of appraisals that
were questionable. The professional organization found that a whopping
12% of home buyers in the last year experienced the cancellation of a
contract as a result of questionable appraisals. Such problems were
frequently in the low single digit percentage range prior to the
introduction of the HVCC.
Such problems can certainly be an issue for the buyer, but the seller is
the one who typically suffers the most when a contract falls through
because of under-appraisal. A low home appraisal often results in a permanent
mark being placed on the property which can make it even more difficult
to sell. For some sellers, this can mean that their home sits on the
market for months longer than necessary and could result in missing out
on the opportunity to find a buyer.
Home buyers and sellers alike can protect themselves from a low home appraisal;
however, by taking some critical steps. If you are a buyer, ask your
lender to locate an appraiser from your local area. You can also request
that the appraiser who handles your property have a residential
appraiser certification and a professional designation such as the SRA.
When the inspector arrives to inspect the property, it is also a good
idea to make sure you are present to share any knowledge you might have
about recent foreclosures or short sales in the area that could cause
the comps to be off.
Sellers might wish to consider obtaining an appraisal before they list
their home to help guide them in establishing a listing price that is
realistic so they will not run into any problems later with an appraisal
that is lower than the sales price. Providing a copy of the prelisting
appraisal to the buyer's appraiser can help as well by providing them
with additional data as well as another perspective.
Finally, keep in mind that if you do receive a low home appraisal, you can
certainly question it. There is always a chance that the home appraiser will
take into account information that is new or has been overlooked and
will be willing to revise their original appraisal based on that
information.
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