The Problem With Appraisals

Imagine you’ve made an offer on a home and the seller accepts it. The house is pristine and inspections aren’t likely to turn up any problems. You’ve been prequalified by your bank for a loan that more than covers your offering price and you’ve got money to put down. So what could go wrong?

Lately, appraisals have been what’s going wrong. Before a bank will give you a loan, they’ll want to make sure that the value of the home is equal to or greater than the price you’ll be paying. To make that determination, banks have a rotation of certified appraisers they’ll call on to evaluate the home. Most times they’ll compare a home to recent sales in the neighborhood, making adjustments for things such as location, home size, amenities and condition. If there aren’t enough recent sales to provide comparables (“comps”), the appraiser might have to go to another neighborhood or use homes that they otherwise wouldn’t. To the point: if you have 10 different appraisals done on the same property, you’d likely get 10 different prices.

To add another dimension to this problem, appraisers are accountable for their work. If a bank finds that an appraiser has consistently inflated numbers, they may get dropped from the rotation. If a complaint is filed as the result of a overly generous evaluation, they may even lose their license. ¬†As a consequence, appraisers tend to be very conservative in their appraisals. Sometimes they’ll use short sales or foreclosures as comps, when such properties may not be a good sample of the homes in a neighborhood. In their world, it’s better to be safe than sorry!

What’s the solution to a low appraisal? Most often, the buyers and sellers will renegotiate the selling price. If a buyer has made an offer of $200,000 and the appraisal comes back at $190,000, the bank will only finance up to $190,000. The seller will have to come down on the price they’ll accept or the buyer will have to bring an additional $10,000 to closing. In reality, buyers and sellers compromise to get the home sold. If you’re in the market for a home, remember: you’re not out of the woods until you get the appraisal.