Problems with appraisals are causing about 13 percent of contracts to fail, according to the latest data from the National Association of Realtors, and the appraisal problem both buyers and sellers fear the most is a low appraisal that’s substantially below the contract price.
Many people think that once a buyer and seller agree on a price for a property, the deal is done. In the case of purchases financed by mortgages—which is about 88 percent of home sales today — that’s not the whole story. Lenders insist on an appraisal before they will close on a loan and they won’t lend more than the appraiser says the home is worth. The value of the home is the collateral for the loan and no matter what it sells for today, the lender needs to know its intrinsic long term value should the borrower default years from now.
So if a contract says the sale price is $200,000 but the appraiser says it’s only worth $165,000, the buyer has to come up with $35,000 including the down payment. If he was planning on a down payment of only 10 percent, which is about the average today, he’s got to come up with $15,000 more, talk the buyer into taking $15,000 less or lose the house.
Low appraisals occur more often when prices are appreciating rapidly, as they have been in some Western and West Coast markets in recent years. When bidding wars break out among buyers and drive prices up, low appraisals are frequent. One reason is that appraisers rely on at least three comparable homes (number of bedrooms, age, location, etc.) sold in the past six months, or “comps”, to help them value a home. If prices have been rising fast in a hot market, the comps may be out of date but that can be difficult to prove. Recent changes in appraisal practices require appraisers to take changes in current market values into account as well as comps.
Another reason some appraisals may miss the mark is lack of information. Appraisers work under deadlines imposed by the lenders who hire them. Sometimes they are not familiar with a particular community or neighborhood. They also have a lot to learn about the house in a short amount of time. They may not know that the appliances are top of the line or the basement was finished since the house last sold. It’s in both the seller’s and the buyer’s best interest to get the best possible appraisal. Here are five tips to increase your odds of doing so.
Do your homework.
There’s no Kelly Blue Book for houses. Every house is unique and has a unique value that changes at its own rate. Find out its sale history and, with the help of your real estate agent, look for past appraisals of your house and recent sales of nearby houses with the same number of bedrooms and about the same age. You’ll get a good idea of where you stand. Buyers and appraisers are kept at arm’s length under current practices but many appraisers like proactive buyers who share helpful information. Establish a positive relationship that helps him do a good job.
Home improvements usually don’t raise the value of a house dollar for dollar. In other words, you won’t raise the value as much as you spent on kitchen and bath upgrades, or a new deck. However, you have improved the value of the house by documenting what you’ve done with contractors’ plans and receipts, you’ll get more credit than if you leave it up chance.
Declutter and clean.
You don’t need to stage your home for an appraiser’s visit but it helps a lot to clutter and clean. There’s a practical reason to help him see the quality of construction and amenities and a psychological reason to convey the feel and comfort of your home. Since you just went through the process of getting your house ready to sell, hopefully there won’t be much to do.
Educate, don’t sell, the appraiser.
When the appraiser comes to see the house the seller has a great opportunity to help him do his job by providing information on changes to the home that could affect its value the may not know about: recent nearby sales, improvements, features and neighborhood developments such as schools, roads, mass transit, shopping, etc. Provide copies of documentation. Be helpful but don’t “sell.” Offer to show him the house but don’t shadow him if he prefers to look around for himself.
Lenders are required to share appraisal reports with borrowers before closing. Don’t wait for yours to arrive the mail, call your lender after the house tour to make sure you get the report ASAP. If you are unhappy with the results, read it carefully for oversights or possible errors. Bring these to the attention of your lender. If you have a real problem with the results, you have options. You can request another appraisal (which you will pay and may delay closing) and you can even appeal up to the state licensing commission if you have a strong case.
If in the final analysis the appraisal is too much below the contract price to save the deal, console yourself with the knowledge that you could very well have been paying too much for the house. You would have been underwater on your mortgage from the day you closed and building equity would have been an uphill battle.