Low appraisals a hiccup in the mortgage market
We all know that a referee in sports is the final word on whether the ball was in or out and whether the boxers have followed the rules. Buying real estate can be viewed as a sport, a very expensive one, where the referee is the appraiser who can make or break the deal before the finish line.
The housing market is in a slow but steady recovery, spurred on by record low interest rates. However, one of the little hiccups in the mortgage process is low appraisals, preventing buyers from taking advantage of depressed prices before they start to move up.
The majority of real estate buyers, including many investors, are making offers contingent on obtaining a mortgage on that property. In a normal real estate market, which we have not been experiencing in many years, the value of the property being appraised is based on comparable sales in the area.
However, in order for this method to be effective there must be an abundance of market activity and relatively recent sales of properties similar to the subject being appraised. Up until the real estate bubble burst, this system worked just fine, providing both sales and an appreciating market.
Now that more buyers are starting to move into the marketplace to take advantage of affordable prices and advantageous interest rates, low appraisals are becoming an even bigger issue, having a negative effect on the market’s recovery.
Part of the problem is that home prices have gone so far down in some areas flooded with distressed properties it’s almost impossible to find a sale to support any kind of appreciation that may have occurred. Not only is it difficult for appraisers to support values, it’s also a challenge for them to find good comparable sales in a market where sales have been few and far between.
The final blow to the appraisal process is government regulations putting pressure on appraisers not to over inflate valuations, creating a culture of unnecessarily conservative valuation. This is a very real problem handicapping the recovery process with about one-third of transactions impacted by low appraisals.
What can a potential homeowner do? The first thing to do is research sales in the area where you’re thinking about purchasing a property so you know beforehand if you may encounter a financing problem. Although appraisers won’t like it, you can accompany them during the inspection and also provide them with a list of improvements in the property or even your own comparable sales, which they may or may not accept.
If the appraisal does come in low make sure there are no obvious errors in the appraisal – number of baths, bedrooms, square footage, which could have lowered the outcome. You could always get another appraisal, which you will have to pay for, in the hope that a new appraiser will be better informed or find something the first appraiser did not.
The last option is to reevaluate and or renegotiate the agreed upon price with the seller, resulting in a lower sale price and a lower mortgage which will pass the appraisal process.
Unfortunately, it could take several more years of improved sales before an adequate history is established for appraisal purposes. In the meantime, the appraiser is the person of authority with the neutral point of view calling the shots and throwing down the flag slowing down the game.