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Low Appraisals – What Can You Do?

May 10, 2012

It’s argued that overly generous appraisals were a contributing factor in the housing bubble from which we’re trying to recover. But, now the pendulum has swung, and many in the real estate industry are lamenting what seems to be overly conservative appraisals.

Here’s an example of what happens. A buyer and seller agree on a price for the home sale. An inspection is done, credit worthiness checked, and all is moving ahead smoothly. But the appraisal comes back lower than the price everyone has agreed to. What now?

Well, the buyer and seller have a few options:

1. The buyer can walk away from the deal if their offer contained a financing contingency. The bank lends on the appraised value, not the higher sales price, therefore, the buyer is not able to secure financing at the original terms, and this can negate the contract. However, many buyers are emotionally attached to the house by this time, and they don’t want to begin their home search all over again.

2. If approved, the seller can secure another appraisal as a second opinion. There are many reasons appraisals can vary from one professional to another. A big reason is simply familiarity with the area. An appraiser who’s worked and even lived in the geographical area they are servicing can make more accurate valuations because they recognize true comparables vs. outliers, know the schools, and understand the subtle amenities that elevate home values in certain neighborhoods. An inexperienced appraiser or someone from out of the area doesn’t usually have the background to take those factors into account. In the end, appraisers offer “opinions” of value, and sometimes opinions can be flawed.

3. The seller can agree to drop the price. The benefit is the closing will still happen, but for less. Otherwise, the home goes back on the market and the process begins again. In a buyer’s market, there’s no certainty that another offer will come soon, or that other buyers will offer the same price again.

4. The buyer can agree to come to the deal with a larger down payment that covers the gap between what the lender will finance and the sales price. It’s not a common scenario, but it does happen.

One way to keep this from happening to your clients is to work with a lender that is committed to using local appraisers. Our approved appraisal list includes local experts who are very familiar with their markets. We even work with our partners to have local appraisers added to the list.

Watch for a future Mortgage Fortune on how you can try and prevent undervalued appraisals from happening in the first place.


Loan Officer Keri Hoots

From Loan Officer Keri Hoots

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