It wasn’t too long ago that when you purchased a home, the appraisal seemed to be a mere formality. The property condition contingency (property an pest inspection) was the one a buyer would fret over. But once those were cleared, it was smooth sailing. After all, since you need to be pre-approved in this market to have your offer seriously considered, the financing contingency is really just getting the appraisal done, and then having an underwriter take a last look at the loan app. A slam dunk, right?
An unwelcome surprise…
What buyers (and sellers) are finding out in this market is that getting the home to appraise at the sales price is NOT necessarily a given — no matter how great both sides think the price is — and that it can leave a real estate transaction in shambles. When an appraisal comes in lower than the sales price, there are basically three options:
- Come up with the difference. To close the deal, the buyer would need to come up with the difference between the sale price and the appraised price in cash. This can be a back-breaker for many buyers who have already scraped to cover their down payment and closing costs.
- Renegotiate the sales price. A buyer can ask the seller to lower the sales price to the appraised price (or something very close to it.) Sometimes the seller will begrudgingly accept this reduction because they don’t want to go through the effort of putting the home back on the market.
- Walk. If the buyer specified a financing contingency in their contract (if you’re getting a loan to fund the purchase, you most likely did) then the buyer normally has the right to cancel the contract with a refund of their deposit if they can’t obtain a written loan commitment from the lender within the prescribed contingency time period.
Note that I didn’t include “get another appraisal” as an option. Why is this? Many banks won’t consider a second appraisal unless there was an egregious error in the first one — i.e. wrong square footage, sales price, bedroom count, etc.. Even if they do allow for a second appraisal, some underwriters will still opt for the lower (or “more conservative” number) anyway. Finally, you always run the risk of having the second appraisal coming in lower than the first, which only makes a bad situation worse.
Why is this happening?
Aside from the obvious answer of “market conditions” there are two factors at play that are making a mountain out of what was once a mole-hill.
- New Appraisal Laws: Just a few weeks ago, the laws that govern appraisals were modified. Financial institutions that previously used their own appraisers must now use independent appraisal companies, also known as Appraisal Management Companies, which aren’t affiliated with their institution. The law also severely limits the communication that can take place between the loan agent (and Realtor) and the appraiser, so contesting a appraisal figure is nearly impossible. And because mortgage broker is now essentially throwing the appraisal request “over the wall” there’s nothing that prevents the Appraisal Management Company from assigning an appraiser who happens to be an expert on Orinda real estate to appraise the value of your San Carlos home.
- Conservative approach. Let’s not forget what caused the current housing fiasco in the first place: Banks loaned money to people they really shouldn’t have on properties that were appraised at more than they should have been. New, stringent loan qualifications take care of the former, and taking a conservative approach on home appraisals solves the latter.
Buyer (and Seller) Beware…
If you’re involved in a real estate contract in today’s market, regardless of which side of the table you’re on, you can no longer assume that the home will appraise at the sales price — even in lovely San Carlos. This is even more relevant if you find yourself in a multiple-offer scenario where the price is being pushed upward.
Be sure you have a back-up plan in case this happens.
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