Low Appraisal Prevention
The best way to handle a problem is to avoid one. Knowing the “comps” in any given area where the buyer is attempting to finance their home purchase will ensure that nothing surprises the funding of your loan or closing escrow and if it does you’ll have every arrow in your quiver ready.
Comparable Sales-The comparable sales of an area help
establish the sales price of homes in any given neighborhood. All comps must include property address, year of construction or manufacture, total square footage, lot size, total bedrooms and baths as well as sales price. Try only to use those homes that most closely match the property in square footage, number of bedrooms, baths amenities and condition. Ask your FSRefund.com Realtor® to retrieve six months of comps divided (trifurcated) by: #1. Active Listings; #2 Pending Listings; and #3 Sold Listings. Ask your FSRefund.com agent to call the listing agents on the Pending
Listing sales to discover the accepted offer price, (those listing agents aren’t obligated to tell your FSRefund.com agent but if he or she is one smooth talker they’ll at least get a pretty good
clue for you.) Be sure to personally check out the comparable active listings because they are the only homes available for buyers to look at, helping to establish what your desired property is worth.
Low Appraisal Causes
Sellers worry in appreciating markets that an appraisal will come into too low to support their record price. In depreciating markets, buyers worry that an appraisal will come into too low to support list price. Low appraisals can happen for a variety of other reasons including:
- artificially inflated prices resulting from multiple offers;
- declining market values with more supply and less demand possibly from foreclosures and/or listed short sales;
- seller overpricing;
- an appraisal mistake not taking into account pending sales date, the wrong comps or appraiser inexperience within the local area;
- Overworked mortgage underwriters can make a valuation mistake moving too quickly and may just need to be walked through the facts more slowly;
- Or in the worst case scenario a lender may be illegally “redlining” struggling areas, where banks perceive a greater loan default risk.
Low Appraisal Solutions
If and when the appraisal you are waiting for comes in too low, remain calm. After analyzing potential factors leading to the discrepancy look to the solutions below in crafting a cogent response.
- Dispute the Appraisal- Make sure that your FSRefund.com Realtor® compares notes with the appraiser to ensure that the applicable comps are used. Sometimes the appraiser’s report of value can be supplemented with your FSRefund.com Realtor’s® comps to achieve a value at the contract sales price. Also ask your FSRefund.com Realtor® to call the pending sale listings if he hasn’t already to try and discover what those pending sale properties are in escrow for. Also ask if the appraiser is based in the area of the buyer’s purchase, as the appraiser may not be familiar with neighborhood characteristics bearing on value. Also examine the appraiser’s report of value to make sure he included all upgrades, amenities or features that make the buyer’s property more valuable than the appraisal amount.
- Call the Lender to Order a Second Appraisal- If the appraiser isn’t
cooperative, submit the comps to the loan underwriter for review with the updated pending sales price information. The underwriter can’t veto the appraiser, but certainly can permit a second appraisal sometimes splitting the cost with the bank. Appraisers are governed by the Home Valuation Code of Conduct (HVCC) and when financing through the FHA, simply ask the lender for an approved list of appraisers.
- Buyer Puts More Money Down- Lenders only care about the appraisal as it bears on loan-to-value ratio. A low appraisal doesn’t mean a lender won’t lend, simply rather isn’t willing to lend as much as a buyer would like to borrow against the property. If the appraisal comes in a small percentage off of the purchase contract price, lenders sometimes encourage a little greater down payment however if there is a large discrepancy the bank may not fund the loan.
- Seller Reduces Price- If a home’s price was inflated to begin with, the other alternative is for the buyer to come down off his price. At the point the first or second appraisals come in both looking weak it may be time to negotiate a give and take to close escrow unless the negotiation has already been stiff so then the seller may perceive no more meat on the bone to negotiate over. Remind the seller that there is no
guarantee that the third appraisal will come in higher, not to mention
restarting the entire process with new buyers in an already anemic market.
- Seller Carries Back a Second Mortgage- If the buyer really wants the home but cannot come up with the difference in cash, making payments or a balloon payment at a later date with a second trust deed to the seller may be a clever solution. Don’t forget that a seller can discount the face value of your note selling it to an investor after the successful close of escrow.
- Cancelling the Transaction- Any competent sales contract will have a loan contingency if the buyer intends to finance. The loan contingency provision will allow the buyer to cancel for being unable to fulfill a pre-condition to the contract: loan approval.