Understanding Appraisal Issues
I know this post is likely to generate a lot of negative comments from appraisers and mortgage lenders but I am willing to take the heat and be honest. Appraisals have always been "A necessary but pointless headache" for Buyers, Sellers and their Realtors.
Here's the bottom line, an appraisal is nothing more than one person's opinion of valuation. It may or may not be a well-reasoned, educated valuation; regardless of whether it is a well done appraisal or not; at the end of the day, it's meaningless other than to the Lender in terms of what they're willing to lend a buyer.
For context and to understand I'm not some upset Realtor indulging in a rant; I have been a full time Broker for more than 40 years. My business partner Andrew Palumbo worked as a licensed appraiser for 7+ years during which time he completed more than 1500 appraisals. In addition, he has been a Realtor for 25+ years. We have both run real estate firms and between us we have seen and reviewed thousands of appraisals, some good and some bad. We know from experience that depending on the mood, level of experience and time constraints that the valuation on any property can vary widely and it is indeed rare that 2 or more appraisers looking at a property at the exact same time will have the same opinion of value.
Why are Appraisals Required?
If a buyer is getting a mortgage, the lender requires an appraisal. Unbeknownst to many buyers is the fact that though their lender charges them for the appraisal, the appraisal isn't being done for them, nor do they own the appraisal. The lender owns the appraisal and supplies the buyer with a copy. The ugly truth is the sole purpose of the appraisal is to provide the lender a scapegoat in the event they need to foreclose and repossess the property because the buyer defaults on the loan and the lender is unable to recoup all their investment.
I and many others would argue that the true "Value" of any property is that which a buyer will pay, and seller will accept at a given point in time. I would further argue that no one elses opinion really matters. That said, if you're getting a mortgage then the appraisal does matter because the lender will only loan you money based on the appraiser's stated opinion.
What Factors Impact an Appraisal?
As odd as this sounds one of the primary factors is the purpose of the appraisal. Depending on whether it is for a conventional primary mortgage, a refi, a construction loan, FHA/VA loan, a Home Equity Line of Credit or a second mortgage; the final valuation will be impacted. Many Realtors and savvy home buyers have long argued that if appraisals are truly meant to give an honest valuation then the appraiser should not be given a copy of the sales contract listing the sale price and loan terms beforehand as this gives them the value the buyer and seller agreed to in advance as well as the Lenders purpose for requesting the appraisal. If you're wondering why the loan type matters as to the value of a property, all I can say is you're not the only one.
Market conditions are another factor that impacts appraisals significantly. In the past few years, we have been experiencing a rapidly appreciating real estate market. Appraisers may be aware of this however they are only permitted to base the appraisal on closed sales. In other words, they can only report on the past. Yet when the market is depressed and there are foreclosure sales in the subject properties area, this is factored in and accounted for in the appraisal.
WHY WOULD A HOME BE APPRAISED ABOVE OR BELOW THE PRICE CONTRACTED FOR?
Homes appraisals will come in above or below a contracted price for a variety of reasons, most are market-related. First, the market value does not support the asking price. This includes inflated prices or declines in the market. If a realtor lists a home that is poorly maintained for substantially higher, or simply lists the home higher than the market value, an appraisal will likely come back lower. In addition Appraisers are humans and can make mistakes. I have seen countless appraisals over the years where the square footage was calculated incorrectly, or a bedroom or bathroom overlooked. I've seen appraisals that came in high because the appraiser was using one level homes as comps for a multi-story homes or vise-versa and as any builder would tell you it costs more to build on one level than to go up. I have also seen appraisers fail to factor in things like new roofs, HVAC systems and upgraded kitchens and baths. I've also seen Realtors fail to notify the appraiser that the contract price was due to multiple offers. None of this was done intentionally, it was simply a mistake and yet getting them to correct this after the appraisal has been completed and turned in is nearly impossible.
WHAT CAN YOU DO WHEN AN APPRAISAL COMES IN LOW?
In large part that depends on the market. While you can ask your Realtor to attempt to negotiate with the seller, in strong seller markets this is unlikely to be successful. Currently in the Research Triangle area market which is heavily favoring sellers due to a lack of inventory, it has become common for Sellers to ask for (and get) Appraisal Waivers where the Buyer agrees to pay the contract price regardless of the appraised valuation.
Another option is submitting a Reconsideration of Value (ROV). This is not easy. Most Realtors, when listing a home for sale, use comparable listings in the area, that appraisers will also have access to. When you are asking for a reconsideration, you will also need to be aware that you need comparable listings to prove the market value of the home is higher. Banks approve loans in the interest of making a profit (Interest) on what they consider very secure investments, when market conditions are volatile, they approve strictly on what is available at the moment. Lenders are prohibited from specifically requesting an appraiser. They have lists of preapproved appraisers from which the appraiser is selected randomly. This means that an appraiser who ay be very experienced in one area gets assigned to appraise in an area where they have limited experience. I've seen this happen many times and frequently it results in very poor comps being used and low appraisal values. When the market is favoring Buyers as it did between 2007 to 2010 for example, Buyers loved getting low appraisal numbers as then their Realtors were able to get desperate sellers to accept lower prices than they had agreed to on the contract. As long as appraisals are required they work best when the market is considered "balanced" which means there is 6 months of active inventory on the market. When this is the case there tend to be many less appraisal issues.
CAN I GET A SECOND OPINION OR MAKE UPDATES TO GET A HIGHER or LOWER APPRAISAL?
There are no guarantees that another appraisal will come in any different than the first, considering appraisals are based on market conditions. If it does it's just as likely to go down as it is to go up. Appraisals are supposed to be reviewed for accuracy and fairness by the rules set into place by the Home Valuation Code of Conduct. If you are assuming that you add a bedroom out of a garage to inflate the estimated value based on more beds and baths, appraisers and banks are more shrewd than that and can account for this. Rest assured that Lenders look at the loan to value ratio carefully and their primary concern is to take care of themselves first and foremost so Buyers need to accept that theres really not a lot of incentive for your mortgage lender to argue a lower than hoped for appraisal.
WHAT IF THERE ARE NO HOMES AVAILABLE AND ALL OF THE HOMES IN THE AREA ARE OVERPRICED?
We are in a situation right now in 2021, where there is limited inventory, sellers are getting above the asking price, in minutes if not hours of listing and the market value of homes is higher than it was two years ago. However, even if you are pre-approved for a home, banks will need the appraisal to come in before backing your loan. You might be on the line for extra funds if banks will not fund in a high market. This is driving up home values in a real way and Buyers need to be prepared to cover any appraisal shortfall or risk losing a substantial amount of money should they fail to close.
As Realtors, with decades of experience, we understand the importance of listing homes at accurate prices and advising our buyers when we honestly believe there is likely to be an issue with the home appraising for what they wish to offer. Ultimately, knowledge is power. The best thing you can do is understand appraisal gaps may impact your transaction if you are buying or selling. If you do encounter an appraisal below your contract price, know that in todays ;sellers market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home. While it might not be music to our buyers ears, we believe it's our job to give our clients the information they need to make smart, informed decisions.
We aim to be your Realtor for life, and we understand that for most people their home is their biggest investment. We want to be sure it is a good one.
If you are considering buying on The Triangle or selling, we would be honored to have your business.Posted by Larry Tollen on