While the real estate industry has seen an upturn in the last few months, spring is always a hot selling season and gradual market recovery is expected, home sellers are still troubled by low appraisals.
What Is a Home Appraisal?
When you're buying a house or condo and find the perfect one, you make an offer to buy it. If accepted, you're "under contract."
This doesn't mean the transaction is over and you can sign on the dotted line and claim your new keys if you're buying or claim the closing check as the seller. Many things can still get in the way of closing. One is an appraisal of the property.
The mortgage lender needs to confirm the property is worth enough as collateral for the buyer's loan. The appraisal is based on comparable properties or "comps" to make sure the price is in line. Appraisals are used for other home loan types, such as refinancings or home equity loans, too.
How Do the Recent Foreclosures Affect Appraisals?
Across the US, both real estate agents and homebuilders are complaining about low appraisals. The National Association of Realtors said that 25 percent of its members have reported clients losing a sale due to low appraisals. The National Association of Home Builders agreed, saying low appraisals were sinking a quarter of all new home sales.
Foreclosure and short sales account for upwards of 40 percent of recent sales. These distressed sales work to lower appraisals in several ways. For example, empty foreclosed homes, with upkeep falling by the wayside, can hurt an area's value, yet buyers may be drawn to the perceived bargain price of such properties. And, these conditions mean high inventory in many areas, so there's pressure for competitive prices.
While a foreclosure shouldn't be compared to a standard sale, more and more appraisers are considering these lower values when appraising homes. That means if you're trying to sell your home in a neighborhood where there are many foreclosures and short sales, an appraiser could determine your home is actually worth less than what some buyers may be willing to pay.
Finally, there are changes in lending rules and regulations affecting appraisals. Everything from selection of the appraiser and how the appraisal is created are impacted.
Action Plan if Your Appraisal Comes in Low
Low appraisals present problems for both buyers and sellers, and everyone wants the same thing - to close the sale. Once there's a sales contract, everyone feels invested and wants to close, but the appraisal could be a deal breaker. Look to your real estate agent or broker, along with your real estate attorney, when trying to make your sale work. Here are possible strategies:
- Challenge the appraisal. Your agent or broker can provide crucial help - did the appraiser know the local area? Were the comps used appropriate? Was information on your property correct?
- Order a second appraisal. Will the lender accept an alternate appraisal? If so, no matter who ends up paying for it, the cost and effort may be well worth it
- Change the contract's financing terms, and work with the terms offered by the lender. The sale may fall apart at this point, but your real estate attorney can help you work through options including lowering the sales price or having the buyer add cash to the down payment. Other strategies could be to rework contract terms to cut out cash back to the buyer or other forms of seller assistance that were built into the original sales price. Take those terms out, and the lower sales price may be more in line with the appraisal, and clear the way for the loan.
The economy and financing conditions may mean your next real estate transaction differs from past experiences. Pricing, market time, negotiations and factors such as the appraisal process may look much different. Even terms and costs for attorney and real estate professionals may be different in today's real estate climate. For example, some attorneys may have changed their fee structures, given complexities and added work needed for some sales types, such as with short sales or foreclosed lender-owned homes.
Be informed, know your options and how to get help, and make it through your closing.
Questions for Your Attorney
- As a buyer, I think my price was fair, and even a bargain. Can I challenge or appeal a low appraisal, or does it mean my sale won't close? Is my only option to bring more money to the table?
- Since the appraisal came back low, can contract terms be changed to make the deal go through?
- I won't budge on my price, and my buyer won't bring extra money to the table to make up for the low appraisal. How quickly can I get out of my contract and get my house back out on the market?