Today I solved a huge Home Appraisal Problem for my client (can I get a woo-hoo?). I thought we could all use a few home appraisal tips to help us with escrows and loan re-finance processes.
First, a little background.
What is a Home Appraisal?
If you are getting a loan on the home you are trying to buy, the bank will require an appraisal to protect their interests. Essentially, they want to know what they can get for the house if you walk away. They will send a certified appraiser who will first study the subject house and then compare it to other, recent and nearby homes that have sold. The goal is to find a home sale (comparable) that is recent and nearly identical.
Identical? My home is unique!
And therein lies the problem. An appraiser must make “adjustments” to account for the differences. The rules around those adjustments have changed, dramatically, over the last 3 years. This means that while a home might enter escrow at $500,000, it might only appraise fo $480,000. That $20,000 difference can destroy an escrow.
What Can I do?
There are a number of best practices that can help sway your appraisal within a reasonable range
Before you go on the market
Know your comparable sales and understand how an appraiser will value your house based on them
When you get an offer
Negotiate your contract with an eye toward probable appraisal value. The best time to handle potential appraisal problems is during contract negotiation. Once you get into escrow, people establish “positions” and it is much harder to get people to accept a different price.
At the point of appraisal
Make sure your agent has a complete list of major improvements. I always meet the appraiser and provide the improvement list plus an annotated list of comparables. I comment on factors that are hard to know if you did not visit the comparable in question: view, floor plan, aesthetics, neighbors. I also try to find out if there is “inside information” on those other sales. Were there many offers? Was the seller under unusual stress? Did the buyer give something in addition to price (all cash, paid the seller’s closing costs the buyer was a Realtor and reduced the price of the home in lieu of a commission)
If it does not appraise for the sales price
Here are your options:
- Ask for another appraisal or challenge the existing one
- Seller reduces the sales price
- Buyer comes up with more cash, if the lender requires it.
- A combination of 1 and 2
- Everyone walks away from the deal
I am sure you know of someone who has had an appraisal problem. How did they resolve it? Do you think an appraiser is always “right”?