Whether you are buying or selling a Billings home, a low appraisal can literally put the brakes on the sale, the appraisal process is among the most critical during a real estate transaction. No matter how carefully the seller’s agent researched the current market, no matter how much the buyer is willing to spend on the home, the fact remains that the lender relies solely on the appraiser’s estimate of value.Let’s take a look at the process and three things you should know about it.
1. The Appraiser
When we reference “the appraiser” in a real estate deal, we’re typically talking about a specialist hired by the buyer’s lender to determine a property’s current market value. Appraisers who specialize in residential real estate use a number of methods to determine a particular property’s value. First, they measure the property and will compare what they come up with to the legal descriptions of the property held by the city or county. They will also evaluate the neighborhood in which the home is located. They’ll use city or county sources, along with MLS statistics, to obtain information on recent sales in the area. They may draw land diagrams and they always write a written report for the lender and the buyer.
2. Why the appraisal may be low
Real estate agents that have been in the business for some time, who have listed many homes and who know the area well, typically come up with the same value for a property as the appraiser. That said, there are homeowners who refuse to take their agent’s advice and overprice the home. This is one reason an appraisal may come in lower than the agreed-upon price, and there are others. These include:
•A shift in the local economy that impacts the housing market. If a whole bunch of foreclosures hit the market quickly, surrounding home values decline.
•The agent and/or the homeowner may overvalue certain improvements made to the home.
•The appraiser may feel the home’s location, or problems, drag down its value more than the agent and homeowner did.
•The appraiser is unfamiliar with the neighborhood and isn’t aware that a neighbor who recently sold his home did so at a reduced price because of a death, divorce, relocation or other reason.
3. Your options when faced with a low appraisal
Let’s face it, a low appraisal is the pits. Buyers and sellers have only a few choices when faced with one.
•The seller can lower the price to meet the appraised value. I know – this is not an attractive option for most sellers. The truth is, you’ll be faced with this same dilemma with the next buyer, the one after that and the one after that.
•The buyer can come up with more cash. For instance, if the appraised value is $5,000 less than the buyer offered on the home, the buyer can somehow come up with $5,000 to add to the down payment. This brings the loan amount to a point where it’s right in line with the appraisal. The problem for the buyer is that he or she is paying more for a home than it’s worth.
•The buyer and seller can meet half way. The seller can lower the price and the buyer can bring in more cash.
•Challenge the appraisal. This isn’t as easy as it may sound. The seller will need to get involved by verifying the accuracy of the report. Appraisers are human and they sometimes get things wrong. Some of these include square footage, the number of bedrooms or bathrooms and the age of the home and these errors may be on the subject property or the comparables used by the appraiser. Sometimes sellers have knowledge about the conditions of a particular sale in the neighborhood that the appraiser isn’t privy to, such as the neighbor mentioned above who sold for less due to compelling circumstances.
•The buyer can walk away from the purchase.
At any rate, if you find inaccuracies you can challenge an appraisal and request a new one from the lender.