Why did my Appraisal come back so Low?
Posted 07-25-2015 at 11:03 PM by Sunshine Rules
It's one of those nightmares both sellers and buyers worry about happening -- the appraisal comes in at an amount less than the purchase price. It happens.
A home appraisal is supposed to be an unbiased opinion of the value of a property at a point in time, completed by a professionally licensed appraiser. An appraisal is an art, not a science.
Appraisers determine a property's value partially by researching the sales prices of nearby homes that are of similar size, style, features and are preferably located within a mile of the subject property. They generally seek out sales that have closed within the past 3 - 6 months. And that is where the process runs into problems -- which sales are actually comparable properties?
The home appraisal industry ran into serious problems during the housing boom years of the early 2000's. So federal regulations were implemented to change how appraisals are done. The Home Valuation Code of Conduct prevented lenders doing Fannie Mae or Freddie Mac loans from having direct contact with the appraisers. After numerous complaints about the system from just about everyone, the HVCC was overhauled in 2010 under Dodd-Frank, but the changes were mainly to clarify the rules rather than substantially change them. So now most lenders work through appraisal management companies, which usually have pools of residential appraisers. These appraisal management companies make money off of quantity, not quality of appraisals. Extensive knowledge of the local market is not high on their list of criteria for appraisers.
Another contributing factor to low appraisals is the federal guidelines themselves. These guidelines were "reformed" to eliminate the potential for inflated appraisal values that contributed to the previous housing bubble crisis. These revamped guidelines lend themselves to more conservative appraisals.
Yet another contributing factor, I think, is our local market itself. Prices are and have been consistently increasing for several years now, but especially the past 2 years. List prices keep testing the waters, often priced higher than the last closed sale in the neighborhood. Multiple offers and bidding wars are more common. Buyers may be willing to pay the seller's asking price but if a mortgage is involved, the appraiser is working with closed sales. The appraiser doesn't care how few homes are in the market in your price range right now, or that this home seems a lot nicer than all of the other ones you've looked at, or that you had to bid three times to beat out another buyer competing for "your" home. Buyers cannot appraise based on market trends.
Home values below $250,000 have also seen outside influences on market prices by the introduction of hedge funds buying up literally hundreds of area homes to place in REITs (real estate investment trusts). The hedge funds typically went after move in condition homes rather than distress sales, paying at or above list prices for those homes. So they drove up market prices and then, because the homes are now in rental pools, are keeping inventory off of the market -- which is also driving up prices. Great for the hedge funds and other big investors, bad for first time home buyers (who typically purchase via FHA) and retirees of more modest means looking to relocate here.
The residential real estate market is controlled by what a "reasonably informed buyer" is willing to pay for a property which, if you think about it, makes it almost impossible to come up with an absolute market value for a property when you factor in the appraiser's subjective opinion and the bias in the appraisal process itself.
That being said, if buyer and seller feel the appraisal is low and mistakes were made in the process, most banks do have a process for challenging an appraisal typically known as "reconsiderations of value." But make sure before you start the challenge process that you have sufficient data to submit. Data such as other sold properties that are better comparables. Point out deficient or missing comparables. If the appraiser failed to note upgraded features or major remodels to the subject property, be sure to point those out as well. Even if mistakes were made in the original appraisal report, there is no guarantee that the appraisal will be revised.
If the appraisal challenge fails, there are just a few options for the buyer and seller. The buyer can come up with additional funds, or perhaps switch to a different lender/new appraisal. The seller can agree to adjust the purchase price to the appraised value. Or the parties can agree to cancel the purchase contract.
Like it or not, appraisals are part of the home purchase process for many buyers. Therefore buyers should protect themselves for just such a possibility by making sure an appraisal contingency is written into any purchase contract. Should the home fail to appraise for the purchase price, the contingency clause gives the buyer the opportunity to reevaluate the purchase and an option out.
A home appraisal is supposed to be an unbiased opinion of the value of a property at a point in time, completed by a professionally licensed appraiser. An appraisal is an art, not a science.
Appraisers determine a property's value partially by researching the sales prices of nearby homes that are of similar size, style, features and are preferably located within a mile of the subject property. They generally seek out sales that have closed within the past 3 - 6 months. And that is where the process runs into problems -- which sales are actually comparable properties?
The home appraisal industry ran into serious problems during the housing boom years of the early 2000's. So federal regulations were implemented to change how appraisals are done. The Home Valuation Code of Conduct prevented lenders doing Fannie Mae or Freddie Mac loans from having direct contact with the appraisers. After numerous complaints about the system from just about everyone, the HVCC was overhauled in 2010 under Dodd-Frank, but the changes were mainly to clarify the rules rather than substantially change them. So now most lenders work through appraisal management companies, which usually have pools of residential appraisers. These appraisal management companies make money off of quantity, not quality of appraisals. Extensive knowledge of the local market is not high on their list of criteria for appraisers.
Another contributing factor to low appraisals is the federal guidelines themselves. These guidelines were "reformed" to eliminate the potential for inflated appraisal values that contributed to the previous housing bubble crisis. These revamped guidelines lend themselves to more conservative appraisals.
Yet another contributing factor, I think, is our local market itself. Prices are and have been consistently increasing for several years now, but especially the past 2 years. List prices keep testing the waters, often priced higher than the last closed sale in the neighborhood. Multiple offers and bidding wars are more common. Buyers may be willing to pay the seller's asking price but if a mortgage is involved, the appraiser is working with closed sales. The appraiser doesn't care how few homes are in the market in your price range right now, or that this home seems a lot nicer than all of the other ones you've looked at, or that you had to bid three times to beat out another buyer competing for "your" home. Buyers cannot appraise based on market trends.
Home values below $250,000 have also seen outside influences on market prices by the introduction of hedge funds buying up literally hundreds of area homes to place in REITs (real estate investment trusts). The hedge funds typically went after move in condition homes rather than distress sales, paying at or above list prices for those homes. So they drove up market prices and then, because the homes are now in rental pools, are keeping inventory off of the market -- which is also driving up prices. Great for the hedge funds and other big investors, bad for first time home buyers (who typically purchase via FHA) and retirees of more modest means looking to relocate here.
The residential real estate market is controlled by what a "reasonably informed buyer" is willing to pay for a property which, if you think about it, makes it almost impossible to come up with an absolute market value for a property when you factor in the appraiser's subjective opinion and the bias in the appraisal process itself.
That being said, if buyer and seller feel the appraisal is low and mistakes were made in the process, most banks do have a process for challenging an appraisal typically known as "reconsiderations of value." But make sure before you start the challenge process that you have sufficient data to submit. Data such as other sold properties that are better comparables. Point out deficient or missing comparables. If the appraiser failed to note upgraded features or major remodels to the subject property, be sure to point those out as well. Even if mistakes were made in the original appraisal report, there is no guarantee that the appraisal will be revised.
If the appraisal challenge fails, there are just a few options for the buyer and seller. The buyer can come up with additional funds, or perhaps switch to a different lender/new appraisal. The seller can agree to adjust the purchase price to the appraised value. Or the parties can agree to cancel the purchase contract.
Like it or not, appraisals are part of the home purchase process for many buyers. Therefore buyers should protect themselves for just such a possibility by making sure an appraisal contingency is written into any purchase contract. Should the home fail to appraise for the purchase price, the contingency clause gives the buyer the opportunity to reevaluate the purchase and an option out.
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