Appraisals: The Mortgage Appraisal (part 3)

Dear Stoneybrook Neighbors,

Happy November!  It’s hard to believe we are nearing the end of this most “irregular” year.  We wish you well during this month of Thanksgiving and hope you have plenty to be thankful for.

We will now conclude the 3-part discussion on real estate valuations.  

PART III

Last month, we discussed the difference of approach and valuation opinion between real estate agents and appraisers.  In the majority of cases, the mortgage appraisal supports the contract price and the loan is approved, the transaction closes, and everyone is happy.  But what happens if an appraisal comes back lower than the contract price?  For example, a buyer and seller agreed on a contract 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.  Many real estate contracts are drafted containing an appraisal contingency (check with your agent to see if this applies). If the appraisal is insufficient to meet the loan requirement, the contract can be canceled.  To salvage the deal, one thing the agent can do is request a copy of the appraisal and review it first for simple mistakes.  For example, we have seen items left out, and a plus value adjustment entered as a minus value, resulting in a 200% deviation!  These errors can be corrected and often the value will become satisfactory.  But if there are no straight forward, objective mistakes, it won’t be easy to contest a low appraisal (because, as we previously discussed, the appraisal is an opinion.) 

So, if the appraiser refuses to change the valuation, the buyer and the seller often renegotiate the contract price. 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 bring in cash to bridge the shortfall.  Or, the buyer and seller sometimes bridge the difference together.  If no agreement is reached, the contract can be canceled and the transaction dies.  Since we are currently in a tight inventory market- that is, there is more demand than supply- sellers might have higher leverage in negotiations, especially if they have the right agents on their side.

Can an appraisal also be higher than true market value? Yes, but it’s not a problem in the mortgage process because the bank is happy to make the loan.  However, it can create a problem if the high appraisal is done for a seller purely to determine a listing price.  

We have responded to quite a few calls from sellers who obtained an appraisal first and then found a frustrating lack of success in the market place in trying to achieve that projected price. When an appraisal is done for a loan, the bank scrutinizes the appraisal. When an appraisal is done directly for a seller, there is no such scrutiny.  Often, we learn that the seller told the appraiser what they think the home is worth, then the appraiser produced the appraisal report to support it.    This can be done quite simply by selecting comparable sales of higher-end homes, or by giving the same value for lesser features.  For example, two homes both have a pool and assigned an equal value, yet the pools are of vastly different quality and appeal.  The result: the valuation is supported on paper, but not in the open market in the real world.

We hope you now have a deeper understanding of home valuation.  Know that there is a difference between “market value” and “collateral value” in a mortgage appraisal when you are buying a home.  Also, know that there is a 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.  We hope you will consider our representation.

Enjoy your November.  Until next month, take care!