This year, a constant complaint among home buyers and real estate professionals has been that home appraisals are coming in too low. The low appraisal problem stems from a couple of different issues.
First, widespread foreclosures and short sales combined with dropping home values have made the job of appraisers more difficult than ever. Appraisals are largely based on comparable home sales, so if homes have not sold recently in a particular neighborhood or if the only ones that have sold have been foreclosures, it can be difficult to evaluate the true market value of a property.
Second, the rules about appraisals changed as of May 1, 2009 with the passage of the Home Valuation Code of Conduct (HVCC). Rules put in place by Fannie Mae and Freddie Mac now prevent brokers from ordering an appraisal directly from the appraiser. Instead, they have to go through the lender, who uses management companies to find individuals that are often inexperienced, unfamiliar with the market and can make costly mistakes. These rules were meant to protect the consumer by preventing over-inflated home appraisals, however many appraisers are now working in neighborhoods where their lack of knowledge is having an influence on their assessment of property value.
If you are a buyer and find yourself in a position where the appraisal on the home that you are buying comes in lower than your offer price, you should first ask your lender and your real estate agent to review the appraisal for errors related to the property’s finished square footage, location, and even the number of bedrooms and bathrooms. Also, make sure you check the license of the appraiser to be certain he or she is permitted to work in the area where the property is located.
If you were able to work an appraisal contingency into your contract, then you can withdraw your offer and have your earnest money deposit returned. If you still want to buy the home despite the low appraisal, it may be worth trying to renegotiate the offer with the seller. Depending on how badly they want to sell, you may be able to get the price lowered to the appraised value. If the seller will not renegotiate and you still want the home, you will have to come up with the cash to make up the difference between the loan amount and the appraised value because the lender will not loan you more than the home is worth. Buyers without an appraisal contingency either have to purchase the home at the contract price by coming up with extra cash or lose their earnest money deposit.
It is important to keep the low appraisal issue in proper perspective, though. While a purchase price that is much higher than the appraised value is probably a deal breaker for most, if the difference is negligible, the attraction of the home itself will likely outweigh the monetary difference in the long run. Believe it or not, property values will eventually go back up.
This article originally published at https://dc.urbanturf.com/articles/blog/the_ins_and_outs_of_low_appraisals/1545.
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