Home appraisals become a brick wall for some San Carlos real estate deals.

June 16, 2009

Once a “rubber stamp”.

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:

  1. 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.
  2. 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.
  3. 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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  1. transient on June 16, 2009 at 2:28 pm

    Honestly, I think appraisals are sometimes no more accurate than Zillow estimates. But at least Zestimates are free whereas appraisals cost $400 or more. Estimating the value of a house is such an inexact science that I think it is silly for anyone to claim they can really get closer than within 5% or even 10% and get paid handsomely to put a bunch of words and pictures to back it up. After all, the true value is what someone will pay for it, and that is very subjective.

  2. Kimberley S on June 17, 2009 at 10:11 pm

    This explains why I’m seeing some houses go pending, only to come back on the market (with a lower price). At least one has had this happen twice, and this is probably the reason.

  3. Chuck on June 23, 2009 at 10:55 pm

    There are numerous reasons why homes go pending and then back on the market again. Aside from the appraisal issue, it can be caused by something that’s discovered during the inspection process that wasn’t disclosed by the sellers.

    But often it’s just a case of the buyer getting cold feet. With this uncertain market, that’s happening with more frequency.


  4. Marc Gerard on June 7, 2010 at 9:12 pm

    First, lenders are not required to use AMC’s, and there is alot of talk among them of going back to managed fee panels. The only requirement is that they have someone order the appraisals and manage the panel who is not involved at all with production. Secondly, don’t forget that these bad appraisers are the very same appraisers who were revered by brokers, realtors and lenders alike. The difference is that when you can tell them what value you’re shooting for, they’re going to hit it. When they haven’t been given a hint however, it turns out that they really have no clue what a particular property is worth. The answer, now that HUD and secondary actually cares about real value? Thin the appraisal heard a bit by getting rid of these unqualified appraisers, and start using qualified, professional, experienced and ethical appraisers. Next target in the crosshairs should be the AMC’s of course…we can do without them entirely as they serve no useful purpose actually. Finally, remember that not every purchase is arms length and legit, though most are.

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