The changing role of appraisals
During the ‘crazy years’ from about ‘04 to ‘08, it was rare for appraisals to come in lower than the contracted sales price. The buyer’s lender’s appraised value simply was the sales price.
Banks business was then and is now about loaning money. But during those years, mortgage loans were made to even those with poor credit, no down payment, no savings, etc. And added to that, appraisals backed up those sales.
Then these intentionally-created bad loans were blended into creative ‘credit default swaps...’ and here we are.
The tide has changed. It can be very difficult to qualify for a loan and there are fewer ‘rubber stamp’ appraisals. (i.e. Contracted sales price: $632,900. Appraised Value: $633,000.) It was amazing then, but much more distressing in hindsight.
Now, for example, contracted $250,000. Appraisal and sales price: $235,000. Contracted: $500,000. Appraisal and ultimate sales price: $435,000.
Closer to accurate appraisals are just one response in small part to the egregious lending practices of the last decade. Appraisals are setting the ultimate bar, not brokers, sellers or buyers.
One of the appraiser’s advantages is ‘lack of emotion.’ They’re not trying to get a listing or to get a better financial return.
If they analytically determine a $10,000, $15,000, or $75,000 difference to the contracted price, they’re placing that value on the property. It’s no longer a rarity for appraisals to come in low.
An appraisal delves deeper than the surface of the same comparables used by real estate brokers.
Sometimes brokers are representing properties with ‘seller assisted pricing.’ List prices are not magic.
It’s not uncommon to see $40,000, $90,000... even $250,000 price reductions before properties sell.
Even if excited buyers have negotiated $40,000 off ‘List Price’ they (and their lender) have a bit of protection by that third party’s unemotional opinion of value. “Arm’s length” and “Just the facts, ma’am.”
Ultimately, buyers only qualify for a loan amount that is a percentage of the appraised valuation of the home. So, what occurs when the appraisal is less than the contracted sales price?
In about 98 percent of real estate contracts, there’s a Financing Contingency which has in it, a ‘low appraisal paragraph.’ (‘All cash’ buyers would be wise to have an Appraisal Contingency in their contract.)
In a brief summary, Paragraph 6 of the Finanicng Contingecy states that the transaction is dead, unless the seller reappraises the property with an appraiser acceptable to buyer’s lender or lowers the price to the appraised value.
Buyers should not, however, depend on their upcoming appraisal as a safety net. They should always seek trusted professionals with referrals to advise them on fair market value as balanced with the asking price.
They should negotiate what they believe to be a fair price – hopefully the appraiser will correct it if very far off.
And sellers, no matter how much you need, want, and hope for, look carefully at the comps your broker presents. Leave your emotions outside. Be brutal on what your own home doesn’t have that that comparable SOLD’s did have.
Why spend months on an overpriced listing with multiple price reductions only in the end, to have an appraisal turn out to be what the broker had advised on Day One?
Hopefully, those who purchased in ’05 - 08 will someday recover from their losses that were borne out of the national tragedy of lending abuses.Elizabeth Erickson is owner and designated broker of Gallery Homes Real Estate. Contact her at firstname.lastname@example.org or at the office: 425-212-4300 or direct: 425-508-1405, or go to www.galleryhomesre.com.