Dealing With Appraisal Issues in this Real Estate Market

DEALING WITH LOW APPRAISALS IN THIS REAL ESTATE MARKET

I've often heard first time home buyers refer to the house hunting process as the "Search For Their Dream Home." If this is the case, then an appraiser can come along and abruptly wake you up from your dream. The National Association of REALTORS® reported that 16 percent of real estate professionals surveyed in June 2011 reported a cancellation of a sale and this was mostly due to a large number of low appraisals.

Appraisals are coming in lower and lower these days. This is largely due to a bifurcated market in which distressed properties are priced one way and the regular sale "mom and pop" home is priced another. In my opinion, short sales bring prices down. Bank owned properties bring prices down. However, regular sales with equity usually hold out for more money.

Depending on the market and the situation, if you are living in an area with mostly regular sales your prices may be flat lined or slightly higher at best. This is true in the Bay Area with Cupertino, Palo Alto, and Los Gatos holding up pretty well compared to other areas such as Morgan Hill and Gilroy for instance with more distressed properties.


Why do an appraisal?

Remember, the appraiser works for the bank but is usually paid for by the buyer. The appraiser creates an appraisal report to show the bank or lender that the property is worth what the buyer is offering to pay. Cash offers don't need to have an appraisal done, however, it's a good idea to know the value.


What does an appraiser check out?

Both Condition and recent Comparable Sales among other things. An important task for the appraiser is to make sure that the condition of the property is acceptable to the lender/bank. Generally speaking, a conventional 25% loan appraisal will be much more lenient than an FHA or VA appraiser.

In a previous transaction where I represented the seller, an FHA appraiser made the seller repaint the exterior of the garage. The paint was old and flaking off on the ground/grassy area. The seller complied to the demand of the appraisal and we closed escrow. In a regular sale (not an FHA or VA) this may have never been an issue. If it was another seller, this could have been a deal breaker.

In another previous transaction where I represented the seller, the seller was required to repair all the Section 1 (termite and other water damage) before the VA loan could fund. My seller complied with this demand and the transaction closed escrow.

In still another recent transaction where I represented an FHA buyer, the appraiser called for some minor repairs to be made prior to the loan funding. The repairs were made, the appraiser went back out to the property to verify, and the loan funded.

In all these three instances, the appraiser was the "eyes and ears" of the bank. They made sure that the loan would not fund unless conditions were met.

In addition to the condition, the appraiser looks for comparable listings and sales in the area as part of the appraisal report. This is a vital part of the appraisal because prices go up and down very quickly in any given market. With so many short sales and REOs on the market prices can get pulled down quickly, especially in highly distressed areas as discussed earlier.


How important is the appraiser's knowledge of the market?

Very important. The appraiser's job is not easy. A good appraiser knows the local housing market well and understands property values in each the neighborhood. They also understand how schools affect value. A good appraiser can see two identical houses side by side and knows that one house is in a different school district than the other. A good appraiser will make price adjustments based on the school's academic performance and overall desirability. A good appraiser is essential in any market, however, this market especially. Otherwise, we can all just go to Zillow and get a Zestimate.


I have experienced all sorts of appraisal scenarios. Here are the three most comon:

Scenario #1 - The appraisal comes in at the purchase price. This is often the case and the transaction goes through smoothly.

Scenario #2 - The appraisal comes in over the purchase price. This happens once in a while and the buyers are ecstatic to know that they have some equity before they even move in.

Scenario #3 - The appraisal comes in low. This just happened to my buyers who are first time buyers and are buying a bank owned property (REO). The appraisal came in 10K lower than the purchase price. Luckily, I negotiated on behalf of my buyers and the sellers (bank) agreed to lower the price by 10K. This was great news to the buyers who ended up getting a 10K discount on the house. The transaction went on to close, however, it could have easily went the other direction and fell apart.

What are your options if the appraisal comes in lower than the purchase price?

Basically, there are a few options you can take as a buyer if the appraisal comes in lower than the purchase price. The options are: walk away from the transaction; negotiate down to the appraised price; come up with the difference out of pocket and continue the transaction; demand an appraisal review and contest it; pay for a second appraisal.

Have your real estate agent give you a Market Analysis of the property you want to buy before you write an offer

An important step you should take with your real estate agent is to make sure that you know the comparable sales in the area. This will save the buyer and seller and everyone involved lots of time and energy.

If a short sale property is listed at 150K and my buyers want to go right away and see this great deal that is too good to be true. I tell them maybe it is just that - Too good to be true. Why? Because the bank will undoubtedly bring in their own appraisers and find out what the true value is. If the last few sales (of similar homes) have sold for 350K, it just won't sell magically for 150K. Last I checked, the bank doesn't give away money. The seller or bank will come to know the value by the appraisal report and will adjust their price accordingly. After months of waiting for this short sale, the buyer will most likely walk. So, there really is no need to run to that short sale property priced at the unbelievably low price.

Your real estate agent is your best resource to help you establish value and possibly negotiate for you if you are faced with a low appraisal.

For more information about the real estate market, call Daniel at (408) 460-8401.