As a seller you typically care about an appraisal and as a buyer you typically care about an appraisal. It can be one of those universal areas of interest that can create some anxiety from either party... but is also sometimes the hardest thing to decipher.
Home appraisals are conducted by a professional appraiser to give an estimate of the market value of a house or property. They are most often conducted at the behest of the lender.
In some instances, home appraisals can come in low because values have been declining in the neighborhood, improvements need to be made to the dwelling or the buyer has simply offered too much. A lower home appraisal can derail a potential sale when a lender won’t agree to provide the full amount of financing the buyer needs to close the deal.
Why home appraisals are important
Appraisals are important to mortgage lenders because it ensures that they did not approve a loan to a borrower for more money than the property is worth, says Al Graham, regional manager of Georgia, Alabama and Florida at Silverton Mortgage. The appraisal also protects the buyer from overpaying for a property.
Home appraisals are important because they are used by a lender to help the borrower determine how much he/she can spend on a home and find out the current value of the property, says Rose Sklar of The Sklar Team with Coldwell Banker Realty in Weston, Florida.
Homeowners also seek appraisals to refinance their mortgage or obtain a home equity loan or a home equity line of credit.
“Generally, the loan-to-value ratio is determined by the lower of the appraised value or the purchase price for a purchase transaction,” says Matt Hackett, operations manager of Equity Now, a New York-based direct mortgage lender. “For refinancing, the loan to value is determined by the appraised value. This ratio is very important from both a qualification and pricing standpoint.”
Why avoiding a low home appraisal is important
A low home appraisal may mean that it takes longer to sell your house, which can be problematic if you have started the process of buying another home. If you have immediate changes such as planning to move for a job or a divorce, the low appraisal can make it harder to sell the house at the price you had hoped to obtain.
A low appraisal may also mean the house could be on the market for a longer period. Buyers are sometimes deterred by homes that have been on the market for many months, perceiving that there are problems with the house or asking price.
What causes low appraisals
Many factors can figure in a low appraisal. Taking the time to repair leaky faucets or more major issues such as an old fence can boost the value of the home. Here is how you can combat some of the most common problems.
A home’s appearance matters
A dirty or ugly home will unfortunately affect your appraisal negatively, Graham says.
How to avoid: Before you list your property, consider having it professionally cleaned both inside and out and staged not only for prospective buyers, but for appraisers as well, he says. Don’t forget areas such as the attic, basement and garage, especially if they are unused. Clean up and mow the yard, touch up the paint and pack up tchotchkes.
Changing market conditions
Appraisers use comparable houses known as “comps” in the general area to help determine the value of a property. Since market conditions change so rapidly, a “comp” that is more than a month or so old may no longer be relevant in the current market, Graham says.
How to avoid: Do your research on how fast or slow values of homes change in the area. There might be times when sales slow such as the end of summer or winter when fewer people are looking to purchase a house.
Lack of recent “comps”
A lack of recent sales of comparable properties in the area could dramatically affect the appraised value, Graham says.
You might live in a neighborhood where homes are rarely sold or in a new part of town that is still being developed. If you live in a fairly new high rise and few condos have been sold to a second owner, that could impact an appraisal.
Many times there are not enough closed sales in the area to choose from, Sklar says.
“Banks typically only go back three months,” she says. “When homes sales slow down, good comps age very quickly, many times leaving no comparables to choose from and causing a low appraised value.”
How to avoid: Check out the number of home sales in your area and what time of year most of them occur. If you can wait, try selling your house during those periods of the year.
Disconnect between the appraiser and the buyer
A home may be worth that extra $5,000 because it’s in the buyer’s preferred school district or on the same street as a relative, but the appraiser does not take sentimental value into account, Graham says.
How to avoid: This could be harder to avoid because it is often personal in nature.
Appraisers look at the comparable sales in the neighborhood and generally “bracket sales with a lower sale, a higher sale and a very similar sale and arrive at a number they deem fit,” Hackett says.
The reasons for low appraisals are generally more due to an unrealistic idea of value than anything cosmetic,” he says. “Appraisers are human and they will generally react more favorably to a well-maintained home.”
How to avoid: Look at the prices of homes sold within the past month that are similar in size and age to determine a range for your appraisal before it is conducted.
How often do home appraisals come in low?
Low home appraisals do not occur often. Fannie Mae says that appraisals come in low less than 8 percent of the time and many of these low appraisals are renegotiated higher after an appeal, Graham says.
How often a home appraisal comes in low depends on the neighborhood and market conditions. Currently Equity Now, for example, is seeing 2 to 5 percent of appraisals come in short, Hackett says.
The majority of appraisals tend to come in at the right value, Sklar says.
“Those that come in low in today’s market are often a result of other properties or units that have not been upgraded, causing low comparables that are in turn used by the appraiser,” she says. “Always check your appraisal over and make sure that the comparable uses are fair and just.
Steps you take to head off a low appraisal
Sklar recommends that the real estate agent meet the appraiser at the property to point out the property upgrades and show recent receipts that the homeowner has to demonstrate them or other improvements that were completed.
“It is also a good idea to try and get an appraiser who is familiar with your area,” she says.
Consumers are allowed to challenge the appraisal and provide any additional comparatives for consideration, Sklar says.
“If the appraisal comes in below value, the buyer can also make up the difference in cash,” she says. “A low appraisal does not always mean the lender will not provide a loan.”
Homeowners cannot shop for appraisals and simply get a second one, Hackett says.
“As a lender, we are not permitted to get a second appraisal unless the first appraisal is grossly incorrect,” he says. “This would be extremely rare as the lender is selecting the appraisal or at least the appraisal management company. We do a tremendous amount of due diligence on appraisers before engaging them as they are determining the value of collateral supporting the loan and are crucial to the lending process.”
Contributed by ELLEN CHANG