Appraisals: The Mortgage Appraisal

June Cover

Happy June!  We are near the half-way point of the year.  The rainy season in Orlando is coming and the summer is certainly upon us.  We hope you will have a fantastic month of June.

We will continue from the last 2 months and conclude the 3-part discussion on real estate appraisals.  Next month, we will provide a 2015 year-to-date summary of the Orlando housing market!

PART III

Last month I discussed the convergence as well as divergence of approach and valuation opinion of real estate agents and appraisers.  As I said, in majority of cases the mortgage appraisal supports the purchase price.  So what happens if an appraisal comes back lower than the purchase price?  For example, a buyer and seller agreed on a purchase price of $300,000 and the mortgage appraisal comes back valuing the home at only $290,000.  When this happens, the transaction can be in jeopardy.   The standard real estate contracts in Florida (FR/BAR-3 and CRSP-13) both contain appraisal condition within the financing contingency.  The provisions differ in detail, but generally if the appraisal is insufficient to meet the loan requirement, the contract can be cancelled.  To salvage the deal, we first request a copy of the appraisal and review it for simple mistakes.  For example, I have seen an adjustment value that’s supposed to be a plus entered as a minus, thus resulting in 200% deviation.  That can be corrected, but if there are no simple mistakes, it’s very difficult to contest an appraisal in recent years.  Many have tried, few have succeeded.   So the next step is typically renegotiation between buyer and seller. Based on circumstances and the perceived quality of the appraisal, sometimes the seller will reduce the purchase price to the appraisal value.  Other times, the buyer will pay above appraisal value.  Most commonly, the buyer and seller bridge the difference together.  When no agreement is reached, the contract can be cancelled and the deal dies.

Can an appraisal also be too high? Yes, but in mortgage process this is not a problem. The bank is happy to make the loan. It does create a problem, when an appraisal done to determine asking price of a home is too high.

I have quite a few experiences responding to calls from sellers who obtained appraisals first, and then found frustrating lack of success in the market place in trying to achieve the projected price. When I review these price-setting appraisals, I can always find the assumptions that led to unrealistic results.

As I discussed last month, the bank scrutinizes mortgage appraisals. When an appraisal is directly performed for a Seller, there is no such scrutiny.  I’ve seen value comparison derived from sales of higher-end homes, higher-end builder, and/or in higher-end communities.  I’ve seen generalized equating of different features.  For example, both homes are pool homes and assigned equal value, yet the pools are of vastly different quality and appeal.  The result: valuation is supported on paper, but not in the open market in the real world.

I hope you now have a more balanced understanding of home valuation.  Know there is a difference between “market value” and “collateral value” in a mortgage appraisal when you are buying a home.  Also know there is difference between “appraisable value” and “achievable value” when you are selling a home.  When you are in the market to buy or sell a home, there is no substitute for an experienced agent as your consultant.

Enjoy your summer.  Until next month, take care!