In a Strengthening Market, Appraisals May Not Keep Up With Prices

I live in one of those pockets of the U.S. where home prices never dropped as dramatically as elsewhere and in some instances, appear now to be rising. Other such pockets exist across the U.S. — just look at your local (not national) headlines to see whether you’re in one of them. But even if you’re not, keep reading to see what growing pains your own market might soon endure.

We’re only at the tentative beginnings of this mini-trend. And that very transition is leading to complications at appraisal time. The situation was summed up recently by Realtor Julie Scheff as, “multiple offers [] driving prices upward and conservative appraisals [] dampening them downward (in an April 20 article in the Montclarion called “Multiple offers signal a strengthening realty market”).

By way of reminder, most home buyers take out a loan in order to buy a home, thus making the bank or other lender a key player in closing the sale. What the bank says, basically goes. And the bank will nearly always require an appraisal, in order to make sure that the house is worth the amount of the loan in case it ends up foreclosing.

Appraisers, meanwhile, have become a conservative lot. They got burned in the real estate meltdown, collectively accused of having willingly gone along with insane levels of home price inflation. So they take a much closer look at properties now before proclaiming their value, and if they don’t see comparable sales supporting the amount the buyer wants to pay, they may not sign off on the magic number.

The last thing you want in a market that still isn’t exactly superheated is to have the deal fall apart because the appraiser, having looked around at all the low comparables, says that property isn’t worth what the buyer and seller have agreed upon. Fortunately, there’s no reason to just sit back and wait for that to happen.

Avoiding a low appraisal in advance. It’s possible to forestall a low appraisal by helping the appraiser recognize the property’s value. Whether you are the seller or the buyer, you can commission your own, independent appraisal of the property, and give those to the lender’s appraiser ahead of time.

You (or your real estate agent) can also research and advise the appraiser of any local short sales or foreclosures that might artificially bring down the numbers. (Contrary to rumor, you are allowed to speak with the appraiser, though the lender may not do so.) Give the appraiser a list (with before-and-after photos, if possible) of interior features, upgrades, and improvements, all of which can boost the property’s value. And by the way, sellers, keeping the property looking good through appraisal day doesn’t hurt, either.

Your real estate agent’s industry connections can help here, too. Your agent can speak to other agents with homes in escrow and ask for the sales prices, then — assuming they reflect rising values — prepare a list of these homes with their agents’ contact information for the appraiser.

Dealing with a low appraisal. If providing advance information doesn’t work, and the appraisal still comes in low, the seller and the buyer can call up the appraiser and question the bases for the appraisal, hoping for a reevaluation. You can also commission a second appraisal, and (assuming it’s better) show that to the lender — though the lender has no obligation to accept it.

If you’re the seller, your main hope may end up being that the buyer is willing to pay the original price (particularly likely if you were in a multiple bid situation) but increase the down payment and take out a smaller loan. That just heightens the importance of sellers carefully scrutinizing the buyer’s financials before accepting an offer, and asking for detailed information on the buyer’s income and savings. Yes, it may feel like the seller is delving for private information, but the buyer has good reason to consent to share it in this situation. (It’s also another good reason for sellers to prefer a buyer who offers a large down payment to begin with.)

Barring this, a price drop (or failed deal) may be your only option. But buyers, don’t be overly alarmed if an appraisal comes in low, particularly if you did your research or were in a competitive bidding situation. While the appraiser is a professional, and the process is backed up by evidence, every house is unique. A house’s value comes down to what a buyer is willing to pay and a seller is willing to accept.