Ah, the appraisal – that crucial moment in the real estate rollercoaster when a third party has the opportunity to grease the slides or throw a wrench in everything. It's like the official judge declaring the worth of a home, guiding everyone through the financial dance of buying and selling property.
But when that appraisal comes in lower than expected, it's like a comedic plot twist in an otherwise smooth storyline. Suddenly, the whole cast – buyers, sellers, Realtors, and lenders – find themselves scrambling to improvise and keep the show going.
Having been in the real estate game for a while, I've seen this drama play out time and again. The sigh of relief when an appraisal matches expectations is practically audible across town. Yet, there are those nerve-wracking moments where every party involved is holding their breath, hoping for the best outcome.
A Brief Introduction of Appraisals
Sure, low appraisals are like the rare guest who shows up uninvited to the party. Estimates put them at around 8-10 percent of total appraisals, but that's enough to add a pinch of unpredictability to the real estate recipe.
Think of an appraisal as the lending world's version of a safety net, ensuring that the value of the property makes sense in relation to the loan amount. It's like the lender saying, "Hey, let's make sure this adds up!" Most contracts state the appraised number (dollar value of the home) must be as high - or higher - than the contract price agreed to by buyer and seller.
So, who's the Sherlock Holmes behind the appraisal? Well, it's a licensed professional who swoops in to play detective, scrutinizing every nook and cranny of the property. They're like real estate sleuths, examining condition, location, amenities, and comparing sales like it's a game of real estate chess.
But, here's the twist: just because they're on the case doesn't mean everyone's going to see eye to eye. Sometimes, it's like two detectives disagreeing on the prime suspect. Hey, it keeps things interesting, right?
In fact, appraisers will occasionally come up with a lower number than 5-6 buyers that submitted offers on a property 😬
The Importance of the Appraisal in Mortgage Financing
The appraisal's decision holds some serious weight in the world of deals. For buyers, it's like the final stamp of approval, confirming that their investment is solid and paving the way for sweet loan deals.
Now, sellers? Oh, they're all about that validation. It's like a big thumbs-up to their asking price, giving them that extra boost of confidence.
And let's not forget the lenders. They're like the backstage managers, using the appraisal as their secret weapon for risk management. After all, they don't want to end up with a lemon of an asset on their hands, do they?
Impact of low appraisals on home sales
For sellers
A low appraisal can be particularly jarring. It means reevaluating the deal and possibly lowering the price to align with the appraised value. This adjustment can erode profits and disrupt people’s financial plans.
For buyers
Buyers are hit with a double whammy: they must either increase their down payment to cover the gap or face the daunting task of renegotiating the deal, risking the entire transaction.
Additionally stressful for buyers is that a low appraisal might make them question the value of the home and whether they are about to pay too much. Often, though, buyers feel comfortable with their price and simply disagree with the lower figure determined by the appraiser.
A low appraisal can derail mortgage approvals by skewing the loan-to-value ratio. It can prompt lenders to offer less attractive terms or, in some cases, withdraw their offer altogether. Your mortgage can be denied even if you have a preapproval when a lender doesn’t like the value.
How Are Low Appraisals in Sales Dealt With?
If the appraisal comes in lower than the purchase/sale price, buyers, sellers and Real Estate Agents can contest the figure. Agents will often provide a report that outlines how they came to the current sale price to show justification for that figure. It's up to the appraiser to consider this report or ignore it. Some appraisers are open-minded; others don't want their results questioned. Ever.
If the appraiser won't reconsider, the buyer can try to get a new loan that would trigger a new appraisal (this won't work on VA or FHA loans). If that's not an option, the sale price might need to be lowered or the buyer may need to bring in cash to make up the difference between the purchase/sale price and the appraisal figure.
The last resort is that the sale is cancelled and the seller looks for a new buyer, again with a new loan and appraisal.
Opinion: The Biggest Challenge with Appraisals
I've had generally good experiences with appraisers and it's wise for the lender to have someone outside the sale give them an opinion. On the other hand, an appraiser's opinion of value is just that: one person's opinion. Just as a buyer, seller or Real Estate Agent might misidentify the property's market value, an appraiser can do the same.
The difference is that the market will generally correct a buyer, seller or agent. An appraiser essentially gets to operate independently of such accountability.
A buyer might feel very confident in the price they are paying.....until the appraisal comes back low. That report can instill fear in a buyer that they are overpaying and their confidence can disappear in a moment.
Summary: Experience and Creativity Are Key
While low appraisals aren't the norm, they aren't exceedingly rare, either. Working with an agent who has experience with financing and appraisals is important, as is having an agent who is creative in finding solutions to these types of problems.
