When a home doesn’t appraise…why it happens and what to do about it…

Village of Scarsdale Tudor Architecture
State of the Scarsdale Housing Market – Trends from 2015 & onward…
March 25, 2016
Irvington Train - Hudson Line
The NYC commute – beyond the train ride…
April 12, 2016
Show all
Knowing your numbers

We live in an interesting world.  With home prices rising and inventories low, the last thing most of you would be expecting from me is a news letter about appraisal problems.  How could that possibly be an issue right now?  This would seem like a total no-brainer. Prices are going UP, so what’s the problem?

Banks and home buyers inhabit two different worlds…

Real estate agents, buyers and sellers are living in a world where the number of buyers exceeds inventory. This results in multiple bids, backup offers and even bidding wars in the face of thin inventory. This is all driving prices upward.

Although banks and appraisers are aware of this, they rely on data that comes from closed sales.  They are looking at values through the rear-view mirror.  They are also constrained by a more limited range of data that is focussed exclusively on sales that happened within the past 180 days.

Even if there are offers coming out of the woodwork, with lines of buyers around the corner all jockeying to make the best offer on a property, it doesn’t matter in terms of the appraisal.

In the real world, markets drive real estate values, but numbers drive appraisals. And these two worlds are not always in sync.

Low volume means fewer comps and fewer comps can cause problems…  

Low volume means comps can be hard to find and given how granular the market is (a few blocks can make a great deal of difference) the criteria can be downright impossible. So you then find harried appraisers chasing comps that are essentially purple squirrels.  What they need to satisfy the bank, doesn’t exist in this market.

Add to that the fact that the pricing is based on past closings in a market that’s appreciating, and its no surprise that some appraisals come in on the low side.

This is being seen nationwide in areas where demand is high. The increase in low appraisals was tracked in this article by KCM and is  quite an eye-opener. It jumped considerably in mid-2015.  Although the high mark of low appraisals has been heading down over the winter months, it remains high.

What to do in the case of a low appraisal…

There are several ways to go if you wind up in a situation like this:

1. File for an appeal:

If you think that there really was a mistake, the appraisal can be appealed.  These can be difficult to do.  After all, you are asking a professional to reconsider their findings.  Further, many people ask for this simply because they need the appraisal to “hit a number” that will make the deal flow more smoothly.  That’s not their problem and it shouldn’t be approached in this way.

The point is, that if you are in a situation where buyers are coming out of the woodwork and your price point makes sense in, an appeal is worth a try. If you are lucky, there may be an obvious error in the initial appraisal or new closings to be considered that would change the numbers of the valuation.

2. The buyer and seller can agree to lower the price to the appraisal price:

A buyer may want to go this route as the court of first resort, but they need to be careful if there were multiple buyers in play.  Chances are the original sales is price closer to true market value. As a result, the sellers may not want to do this, particularly if they were sitting comfortably on a pile of backup offers during negotiations.

Sellers should bear in mind that even though the market determined the price, you might run into the same problem all over again should  you opt to put the home back on the market.

3. The buyer can bring additional cash to the table. This can close the gap between the approved loan amount and the sales price.

Of course, a great deal depends on how much money this is and the finances of the buyer.  In a multiple offer situation, it is often obvious that the appraisal is way off the mark. That’s when this option makes sense if appealing the appraisal doesn’t work.

4. If the appeal isn’t successful and the two parties can’t come to terms, the buyer can walk away. That’s why there are mortgage contingencies in almost every contract.

In this case, the buyer will get their earnest money back.  They will, however, lose the money they invested in inspections and the appraisal itself.

Don’t think of this in terms of winning and losing….

This is generally a case where there are no winners.  If the seller lowers the sales price, they feel cheated, if the buyer brings more money to the table, they often feel they have been had.

But if everyone calms down and realizes that the bank’s criteria is not in sync with the actual market, agents and their clients can come up with a good solution. If an appeal doesn’t work, I encourage both parties to come to the table and try to work out something that can become a win-win for all parties.

© 2016 – Ruthmarie G. Hicks – https://thewestchesterview.com – All rights reserved.

Digiprove sealCopyright secured by Digiprove © 2017

Please feel free to contact me anytime to request additional information or to set up an appointment so we can explore your listing or purchasing needs. I am easy to reach by phone, text or email. Or, if you just want to continue your search online, the links below will help you get started.

Phone/Text: 914-374-5529

Email: Ruthmarie@TheWestchesterView.net

Property Search Home Valuation Open Houses

Comments are closed.