As the real estate market heats up and prices continue to recover, more home buyers and sellers are likely to encounter the problem of an appraisal that is lower than the agreed-upon sale price.
The reason for this is that appraisals must be based on recently settled transactions, and in a rising market those past transactions are likely to be lower in price.
When we price a home with a seller or determine an offer price with a buyer, not only do we look at what has sold, we also look at what is currently in contract, homes currently for sale (seller competition) and current market conditions such as rate of property absorption (buyer competition). Unfortunately, an appraisal doesn’t these factors into consideration.
Whether a buyer or seller, it’s important to understand the risks involved around low appraisals – and the options available.
As a result of the restrictions placed on the relationship between lenders and appraiser – aimed at curbing the appraisal abuse that contributed to the housing bubble – buyers and their mortgage representatives have less control over the process. Lenders simply order an appraisal from a list of approved appraisal companies, and a third party directs the individual to perform the appraisal.
Due to the third-party rules, the appraiser who is assigning a value to the home may not be from the immediate area. It can help to inform the appraiser of the quality of the school district or the amenities in the local neighborhood, as well as improvements to the property as compared with other recent sales in the area.
We also suggest preparing a package of information on the home, including data on comparable houses and any improvements that have been made that should influence the value of the home as this information isn’t always accessible or obvious to the appraiser.
At times we’ve also exercised our right to reject the appraiser on the grounds of lack of local market knowledge, and had a new appraiser assigned for the appraisal.
If an appraisal does come back at a lower value than it should, the appraisal can also be challenged, requiring a review.