Are Appraisals Detrimental to Home Sales?

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It wasn't that long ago that an appraisal was just a mere formality in the home closing process. No one really gave it much thought other than to scratch out a check to pay for it. Then, the real estate market started to flounder, mortgage fraud infiltrated the industry, the economy started to bust and the job market waned. These days, an appraisal can suck the air right out of an otherwise great real estate deal.

Let's say the buyer and seller come to an agreement to sell a property for $350,000. When the appraisal comes back, the home is only valued at $330,000. This is likely due to foreclosures in the area or other home sellers who sold for way less just to get out from under their mortgage obligations. What can the buyer and seller do? There are really just two choices: the buyer can put up more money or the seller can come down to the appraised value. Sometimes, the parties may also meet in the middle.

New requirements and a volatile housing market have made appraisals a tenuous part of the real estate process. Looking at year-to-date numbers in September 2011, one third of Realtors said that appraisals have resulted in sellers and buyers canceling or delaying contracts, or even renegotiating for a lower sales price. This is according to the National Association of Realtors. This number has increased a whopping 29% in all of 2010 and is up from less than 10% before 2009.

Lenders are definitely requiring more detailed home appraisals right now. When an appraiser determines the value of a home, they have to use information from the local market including prices of sold homes. These sales must also be recent which means that an appraiser cannot simply go back in time to when homes were selling for higher prices in the area. When the housing boom was in full swing, appraisers only had to use about three recently closed homes. Now, many lenders require 2 to 3 times that amount.

In order to meet the quota, appraisers say that they often have to use homes that really are not similar to the subject property. In fact, these homes could be short sales or foreclosures. Although they can take these unfortunate circumstances into consideration, these homes still factor into the appraised value.

Are Low Appraisals Good for Buyers?

This more thorough appraisal process does have its own benefits, however. Buyers now know whether they may be offering too much for a property. In the past, the market was so robust that buyers often overpaid just to get the home they wanted.

This process may also cause homes to be cheaper for buyers, but the hassles seem to have increased. If the appraisal does come in too low, the lender will offer a smaller mortgage amount. This can leave a buyer in a precarious situation where they either have to make up the difference, get the seller to reduce the price or lose out on their dream home.

Sellers do often lower their sales prices according to Realtors who responded to a NAR survey recently. During the three months ending with September, 13% of Realtors reported that their contracts were renegotiated to a lower sales price. Another 10% said their contracts were canceled while 8% had contracts that were delayed.

How Can Buyers and Sellers Deal with Complications?

- Sellers should do some research before listing their home to see what others are selling for in the area. They can even visit local open houses, speak to Realtors and look at online listings to compare. Sellers must be realistic as the market has changed over the last few years. They can also go ahead and order an appraisal for a firmer opinion.

- Buyers should make offers which include a clause guaranteeing that they will get their earnest money back in full if the financing does not get approved for the contract price or if the appraisal comes in too low.

What if the Appraisal is Low?

If the appraisal does come in too low, buyers can make several decisions: walk away, pay the difference, appeal for another appraisal or renegotiate with the seller. If any party feels the appraiser is acting unethically in some way, they can be reported to the state's appraisal board.