Appraisal Nightmares

Things have been moving along smoothly. Repairs were completed without a hitch, credit approval came back quickly, title policy was in the works, and both closings were scheduled for the same day…. and then appraisal reports came in. 2 weeks before closing and neither house appraised for the contract price!

What does this mean, you might wonder? An appraisal is a process during which a licensed and knowledgeable person inspects the house and compares it with recent sales that are similar to determine the property’s value. It also means we agreed to pay more than the house is worth, and our buyers did the same. We looked over both reports with our agent and saw that the purchase appraisal was spot on with strong comps. However, there were flaws in our sale house’s appraisal. And we got a lesson in a bunch of the new laws regarding appraisals. For some very good information, check out http://www.appraisalfoundation.org.

When financing a house, you are subject to the loan terms of the underwriters, and each lender has their own policies. As you can guess, many lenders will not write a loan on an over-priced house. They will only lend UP TO 100% of the appraised value, depending on your down payment requirements for the loan type. Some won’t approve the loan for a house appraised at less than the sales price even if you do pay the difference in cash. Be sure to work with a good loan officer that can explain these details. Ours is phenomenal!

So, the options are: pay cash for the difference, if we have it and our lender allows; re-negotiate the price down to the appraised value, fight the appraisal, or finally, terminate the contract. For the new home purchase, we don’t have the funds to pay the entire difference for option #1, after our other planned out-of-pocket expenses, like closing costs. We tried to do #2, and offered to pay what we could and split the difference. Unfortunately, the sellers really wanted their price in order to net a certain amount of proceeds, and feel like they’ll get it. So, since this appraisal was very strong, we had no option but to terminate the contract. I’m almost in tears just writing those words. 😦

Is this a wise choice for sellers? I would say absolutely not in a different market, and maybe even somewhat in this current one. The comparables used were all very similar in size, upgrades, and had all sold very recently. Since this is a “cookie-cutter” subdivision, one comp was even the same floor plan. This appraisal gave a true picture of the house’s market value. Now, if they get another offer and negotiate their desired price, the house is unlikely to appraise for that buyer, either. In the long run, this decision may hurt them more. They may either become desperate and accept a lower offer later or take the house off the market. We are hoping they come to their senses and come back to us after some less-appealing offers come in. We shall see.

The purchase one happened first. The day after terminating that contract, we got a call from our poor sweet agent, who’s voice was shaking, telling us the buyer’s appraisal just came in, and it was also low. Now, we offered very close to the asking price for our purchase. We haggled with our buyers because they low-balled us at first. They eventually came up, though it was still less than we would have liked. We accepted an offer in between our goal and their “best offer” for the sake of getting it over with and achieving our goal sooner. We still understood what the sellers on our purchase felt now.

On the appraisal for our sale, however, we saw some issues. Unlike our purchase, the comparables used to appraise our sale house were not similar in size. Nothing the same size as our current house has been sold in our neighborhood recently. All the sales in the last year were either much larger, or much smaller. The closest comp in size was a 300 square foot difference. The appraiser adjusted for the sizes, but seemed to value smaller homes at a higher price per square foot than the smaller ones, probably because the larger homes used as comps were priced to sell (read: low). They adjusted for upgrades and a few for market time. What they didn’t adjust for, and this is major in my eyes, was the market conditions for the time the house was sold vs. the competitive market conditions today. Some of these comps sold nearly a year ago, and a lot has changed in that time. How are property values supposed to increase when appraisers are basing their value on prices in the past?

We weren’t comfortable with the adjustments made or the total price per square foot. The smaller homes all sold for $2-$8 more per square foot than the appraiser gave our house, even the ones with builder’s grade finishes! The $8 more per square foot was the most similar in terms of upgrades and finishes, like flooring and light fixtures. We thought ours, with all of its upgrades, should be priced higher per square foot than the smaller houses without, or at the very least, equally. This would put our value at exactly the contract price, or slightly higher. Our agent agreed. So, we are asking them the same- to come up with the difference or terminate. The buyer traffic in our area is increasing, while there is literally NO competition. There is only one active listing in our neighborhood, and it is larger, and therefore, in a much higher price range.

So, as we found out, there’s little recourse when you disagree with the appraiser’s report and value estimate. It is just one person’s educated opinion, so why wouldn’t we be allowed to get a second opinion? Apparently, new rules (and maybe old ones, I don’t know for sure) prevent subsequent appraisals for the same sale. The seller’s agent can only submit a rebuttal with a written statement of the portions we disagree with. Then the appraiser can consider them and update the report, or not. They are not obligated to fix or change anything. Fantastic. Since buyers pay for the appraisal, only they can argue it.

Some major issues I have with appraisals in general are the limitations to account for market conditions, and the inability to challenge an appraisal that may not be accurate. Also, lenders can no longer ask appraisers if they think there’s a problem with the price before the appraisal is done.

Now the buyer and their agent must do all the research to determine a good offer that will still likely appraise, while balancing the market demand leading to higher offers and bidding wars. In a multiple offer situation, buyers need to over-bid to have their offer accepted, but then they have to worry about whether or not the appraisal will cause problems like above.

Do I feel a little mean? Yep. I’m sure they’re going to be upset, like we were, and that was an awful feeling. Does my husband? Not all. He’s the money guy, and he feels very angry about the situation. We both agreed that right now, we have more motivation to go back on the market and possibly get our list price and a stronger appraisal than we do to sell. We’re moving for a shorter commute and to upgrade, not because we need to sell. True, we could appraise at the same price, or even lower next time. But with 2 weeks to go and no house to move into, we would rather stay than give up a large chunk of equity. We can wait for a few more sales to go through and serve as better comps for appraisers to use.

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