Three months ago, real estate agent Gary Rogers says he was conducting a fairly routine home sale. Then he received the home appraisal’s report, which valued the three-bedroom colonial in Waltham, Mass., at $430,000, rather than the $448,000 selling price the buyer and seller had agreed to. Unless the buyer agreed to put up more money, or the seller to lower the price, the deal was off. Fortunately, after nearly two weeks, Rogers says the two sides agreed to meet in the middle.
In the past, appraisals rarely disrupted a home sale. But realtors and housing experts say new requirements and a difficult housing market are doing just that. Year-to-date through September, one third of realtors have said appraisals resulted in buyers and sellers delaying or canceling contracts or renegotiating to a lower sales price, according to the National Association of Realtors. That’s up from 29% in all of 2010 and up from less than 10% prior to 2009.
Indeed, lenders say they’re requiring more thorough home appraisals. Appraisers determine the value of a home largely by reviewing the prices at which similar homes nearby sold for in recent months. During the housing boom, appraisers could cite as few as three recently sold homes; today, lenders are often requiring two to three times that, says David Stevens, president and CEO of the Mortgage Bankers Association. To meet that quota, appraisers say they sometimes have to use homes that aren’t similar and may be foreclosures or short sales, though they are taking into account what this property would have sold for if it wasn’t a distressed sale, says a spokesman for the Appraisal Institute, an association of real estate appraisers. “Appraisers have become much more cautious,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
To be sure, a more thorough appraisal process does have its benefits. It lets a buyer know whether they’re offering too much to buy a particular home. “For buyers, the appraisal is a check and balance — it’s there to ensure the buyer isn’t overpaying and the lender isn’t over-lending,” says McCabe.
It may also make houses cheaper for buyers — though not without more hassle. If the appraisal value comes in below the agreed buying price, the lender will typically offer a smaller mortgage. For example, on the house that Rogers sold, the buyer would have gotten a mortgage for $358,400, or 80% of $448,000. But when the appraisal value came in at $430,000, the lender adjusted the mortgage amount to 80% of the appraisal figure, or $344,000. The contract the buyer and the seller had signed, however, stated the higher buying price of $448,000, and the buyer (and potentially the seller) had the option to decide if they wanted to make up the $18,000 difference.
Typical solutions include having the buyer paying that difference out of pocket or the seller lowering his price — or both. And sellers often do lower their prices: For example, during the three months ending September, 13% of realtors reported contracts were renegotiated to a lower sales price, compared to 10% who said contracts were canceled and the 8% who said contracts were delayed, according to the NAR.
Here are ways to make the process easier, say experts, and how to deal with complications.
How sellers can prepare:
Before putting their home on the market, sellers should research what similar homes near them are selling for by looking at online listings, visiting open houses and speaking with realtors, says Rogers. “It’s always good to get more than one opinion,” he says. They can also ask for their own home appraisal, which could give them a sense of how close (or far off) the figures are. The cost of an appraisal varies but typically ranges from $250 to $600.
How buyers can protect themselves:
When buyers make an offer, they should include statements in the contract guaranteeing they’ll receive their initial down payment (typically 3% to 5% of the agreed buying price of the home) back if full mortgage financing doesn’t come through for the agreed price or the appraisal value is below the offer that’s in the contract, says McCabe. Separately, the buyer (who’s required to pay for the home appraisal) should ask for the appraisal report and look at what properties the appraiser used as comparisons, says Rogers. It should, he says, include homes that are in the same neighborhood and the same style. In other words, a colonial home shouldn’t be compared to a ranch.
What to do if appraisal value comes in below the purchase price:
In this situation, experts say buyers have several options. If they’re no longer interested in the home, they can walk away. (However, without a contingency clause — see previous section — they risk losing their initial down payment.) But if they still intend to buy the house and they can prove the report excluded similar, nearby properties or had some other issue, they can appeal or ask their lender for a second appraisal.
If those strategies don’t work, the buyer and the seller can consider working out an agreement on their own. Lastly, to report a problem with an appraiser, consumers can contact their state’s appraisal board.