Rick Richter
Thinking of buying or selling a home?
Even when both sides agree on a price, the deal could fall apart thanks to an under-appraisal.
Here’s the increasingly common scenario: The seller lists the house for $325,000, the buyer offers $275,000 and they settle on a $300,000 sales price. A week before closing, the appraisal comes in at $265,000, the maximum upon which the bank or mortgage company is willing to lend.
Who’s going to make up the $35,000 shortfall? This is a significant problem that happens occasionally, and in the aforementioned scenario, the seller (who has already come down) typically is resistant to dropping the price further. If the seller wont budge and the buyer does not have the cash to make up the difference, the deal will most likely fall apart.
Short appraisals typically arise in a declining housing market because the lack of recent comparable area homes sales, or “comps,” making it difficult for appraisers to determine the current market value of a property.
When home sales slow, good comps “age” fast. Add foreclosures and short sales to the mix and appraisals can run all over the map.
The Home Valuation Code of Conduct, or HVCC, that went into effect last May has compounded the problem. The HVCC prohibits Fannie Mae and Freddie Mac lenders from having direct contact with appraisers. As a result, most lenders have opted to work through appraisal management companies, or AMCs, whose pool of residential appraisers includes those with limited training and/or little familiarity with the geographic area being appraised.
Protect yourself
How can you protect yourself from short appraisals? Here are some suggestions for buyers and sellers.
If you’re a buyer:
- Tell your lender to find an appraiser who comes from your county, or perhaps a neighboring county. After all, you’re paying him or her.
- Request that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute’s senior residential appraiser, or SRA, or member of the Appraisal institute, or MAI, designations.
- Meet the appraiser when he or she inspects the home and share your knowledge of recent short sales and foreclosures that might skew the comps.
And yes, you can speak with your appraiser; the prohibition only applies to your lender.
If you’re a seller:
- Get an appraisal before you list a home. Search for a qualified appraiser in your area on the Appraisal Institute site.
- Use the appraisal to set a realistic listing price for your home.
- Give a copy of your pre-listing appraisal to the buyer’s appraiser.
Question a low appraisal. There’s always a chance the appraiser or a supervisor will take into account new or overlooked information.
I hope this gives you a little more information to make sure you are ending up with the best possible scenario when buying a home.
Rick Richter
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https://www.guaranteedrate.com/rickrichter
