Appraisals and avoiding problems
Purpose of the appraisal:
An appraisal helps to assure the lending party that a home has sufficient value to cover the loan if the borrower defaults and legal action (foreclosure) is required.
The appraisal is usually performed after the other contingencies have been met, often just prior to closing.
If the appraiser reports that the home did not appraise to the selling price, the sale is in jeopardy. However, when the market is undergoing normal appreciation and the selling price is not over the appraiser’s estimated value by too much–say a few percent – the appraiser will usually give the property the benefit of the doubt and reflect a full appraisal on the property.
Appraisal problem reactions:
If the appraised value comes in under the sale price, some buyers will panic as they do they want to overpay for the property. Neither do they want to lose the house when the lender backs away from financing the loan, which could happen if the buyers aren’t putting down a lot of money. After all, they need someplace to move to and, keep in mind that appraisals are usually done with little time left until the closing.
Some buyers feel that a low appraisal is an invitation to renegotiate the sale price. Simply reducing the sale price will usually solve the problem. Or possibly the buyer can put more money down (doubtful). A compromise can sometimes be reached between buyers and sellers; a lower price and more money down may solve the problem.
Must "appraise” to selling price:
Some purchase offers state that the home must appraise to the selling price. On occasion, agents will add this contingency to the offer. Some offices even have this preprinted on their purchase offers.
An agent will say that it's their way of protecting their client, although often the real reason is that the agent is not that familiar with the local prices or that confident in judging the value of properties. An agency may require their agents to do this as simply another layer of liability protection. This usually isn’t necessary since the lender will pull the plug on this deal if the value isn’t there - based on what the appraiser states as to the value of the property.
See if you can get this “must appraise” stipulation removed. Start by crossing it off when you submit your counteroffer. If the agreed upon contract price is what the buyers are willing to pay, why should the opinion assigned by an appraiser jeopardize the sale?
The buyers can try to put you in a defensive position with, “Don’t you think your home will appraise to the selling price?” Let them know that you surely do. Point out that with this appraisal condition, the entire sale is hinging on the opinion of one person. “Who knows what the appraiser will feel is important; got up on the wrong side of the bed, subconsciously hates the style of your home, overlooked your basement bedroom, etc?”
Emphasize to the buyers that having an automatic cancellation based on this subjective evaluation is brushing aside your opinion on the value, their opinion and, if your home is listed, the opinions of the real estate agents involved.
If the buyers insist on keeping this contingency, then get the buyers to agree to a date in the near future when the appraisal should be completed and reported, rather than having this important function performed at the eleventh hour. Be sure the buyers advise the lender about this date commitment.
Appraisers are caught in the middle:
Appraisers want to stay in good graces with the lenders. Most of them do not work directly for the lender, but are from independent appraisal companies. When a home passes the appraisal, the lender makes the loan, makes money and everybody is happy.
A low appraisal leads to no loan, and everybody's unhappy, including the lender. So, the appraiser walks a tightrope between satisfying the lenders, while at the same time supplying the lender with a credible and certifiable appraisal, so that he or she will continue to receive appraisal assignments from the lender.
The uninformed appraiser:
Before the housing market hit the fan, appraisers were often told the agreed upon sales price of the home before they appraised the property.
Suppose an agent was sent on an assignment to appraise a four bedroom, two-story that had a contract price of $215,000. The appraiser would compare this house to others that recently sold in the area for around $215,000. If the appraiser is appraising a $270,000 two-story home that happens to have four bedrooms, he or she will be using houses as comparisons that sold for close to $270,000.
Knowing the sales price ahead of time makes it easier for the appraiser to find comparison houses; it gives them something to “shoot for” as they come up with a value on the property. However this isn’t always the case. If they go in blind, not knowing the contract price, then they have a much greater chance of not appraising the home to the selling price.
During the heydays of anything goes financing (before the housing bust), lenders would "sometimes" give appraisers what they called a "MTO" appraisal request. This Made To Order assignment was given with the contract price along with a wink and the understanding that the appraisal should match this selling price.
Today - not so easy. The lending officer is to have minimal contact with the appraiser concerning the selling price and the appraisal.
The informed appraiser:
The appraiser can usually find houses in the immediate area similar to yours that recently sold. These will be used to validate your selling price. But it really helps the appraiser if a “target” value is already known.
Whether you are a FSBO or are listed, make a copy of the sales contract and give it to the appraiser when they stop by. Simply attach it to your brochure on the home. Point out that the brochure contains a list of all the features about your home, including improvements you made. They’ll be glad you did.
Your home has more potential for loan acceptance when the buyers are putting a lot of money down. An appraisal that's a few percent under the selling price could be doomed if the buyers are only making a small down payment. However, lenders are much more lenient as the buyer's down payment amount goes significantly above 20%. Appraisers know this. A copy of the sales contract reveals how much the buyer is putting down. If your buyers are coming in with a large downstroke, the appraiser likes to know this.
Legitimate price difference:
Appraisers know that a selling price could actually and legitimately be high if there was a "multiple offer" situation during the negotiation process. Be sure to let them know if this occurred. The influence of buyer bidding is widely accepted as a valid reason for a higher than usual price.
Conversly, if a foreclosured house is used as a comp against your home, this would be very detrimental to your appraisal. Alert the appraiser to this possibility - if known.
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