By Alan Donald, BuyHomesInCharleston.com
Here is a situation that unfortunately is becoming very common: Appraisals that are coming substantially BELOW THE CONTRACT PRICE!
Why is this happening?
The main reasons for this new trend are:
- Recent CHANGES IN GOVERNMENT REGULATION (namely the Home Valuation Code of Conduct - HVCC) that dictated that lenders cannot choose an appraiser directly any more (lenders normally would choose an appraiser they know is familiar with the neighborhood). Instead, they have to order the appraisal through a third party company, who in turn has a "pool" of registered appraisers to whom they farm out the jobs. This has caused some appraisals to be conducted by appraisers who are licensed, but from other areas - so they may not be as familiar with the local market. Therefore the comparable properties ("comps") that they may have used, while technically viable, may not be the most adequate.
- The distortions introduced in the real estate market by DISTRESS SALES (short sales, foreclosures, lender-owned homes) have created very low "comps" which the appraisers have to take into account. Some appraisers may discount the weight of these distress sales, others may not (since, in effect, this is "the market").
- An oversupplied market stimulates SELLER CONCESSIONS. If the concessions are common across the board for the neighborhood, appraisers can ignore them. If however, this particular transaction has more concessions than the average, the appraiser has to include the concessions in the analysis.
This situation really stresses out everyone involved in the transaction:
- Buyers think they are being duped into paying too much for the home;
- Sellers think they are being unfairly ripped off, by taking away some money that was theirs (at least in their mind)
- Agents realize the contract has become shaky at best
- Lenders are not willing to honor the original pre-approval, since, according to the appraisal, the property is worth much less than what the buyer agreed to pay for it - lenders may lose the loan if the transaction does not proceed.
So, what happens next? If you are in this situation, what can you do about it?
Here are some options:
- NEGOTIATE A LOWER PURCHASE PRICE that matches the appraised value - this is the easiest and most obvious solution, but sellers usually cringe at selling their home for less price than what someone was willing to pay!
- APPEAL THE APPRAISAL - this depends on the lender that the buyer is using; some lenders have a streamlined appeal process, others refuse to question the appraiser. Even if you get the bank to request a review, there's probably a 50/50 chance that the appraiser will change it. (Hint: ask the Realtors to provide better comparables to provide to the appraiser BEFORE you appeal)
- The BUYERS CAN PAY FOR THE DIFFERENCE out of their pocket, if they still want the property and see its intrinsic value
- The BUYERS CAN OPT TO WALK AWAY from the contract and get their earnest money back (provided the contract is subject to appraisal)
Copyright 2009 Alan L. Donald All Rights Reserved