Low appraisals in top US housing markets is a new reality. You’ve been preapproved for your home loan, made an offer, and the seller accepted it: Your dream of owning a home is going according to plan (even in this overheated real estate market). Or maybe you are refinancing your current home and things are going smoothly… Then comes the home appraisal, and everything comes to a screeching halt. Why?
Increasingly new home buyers and owners who are refinancing are finding that asking prices are above the appraised value, in other words, a low appraisal. This is happening more often these days due to the frantic pace of home purchases and steeply-rising prices not keeping pace with the recent comps. Add to that the effects of the Dodd-Frank Act to maintain appraiser independence, integrity and protect the consumer, but may also introduce issues leading to low appraisals.
Take these 3 steps to lower your chances of a low appraisal happening to your home loan or refinance.
Do Your “Home”work
“Market statistics can demonstrate that there is a trend of home rising prices in your neighborhood, but that won’t necessarily be reflected in the most recent comps,” said David Dietrich of Accurate Appraisals & Review, in San Jose, California. “Keep track of and document current home sales in the last 30 days that sold but are not accurately reflected on the MLS and provide the data to the appraiser prior your appointment,” he said. “Make sure your appraiser will accept borrower information, many will not, but they should.”
Get the 411 on the Appraiser
The Dodd-Frank Act was created to keep distance and objectivity between lenders and appraisals to avoid the possibility of colluding on appraisal results. Because of that, appraisal management companies, or AMCs, select your appraiser, which can lead to other issues.
“These rules were put in place for good reasons, but the appraiser that is assigned to your home loan might not know local market conditions or lack general experience,” Dietrich said. “You can ask about their neighborhood knowledge, training and credentials, and even interview them before the appraisal is scheduled. You are paying for this service and have the right to find out more about them,” said Dietrich.
If you are not comfortable with the person, you can ask for another appraiser. (Tip: you can check out your assigned appraiser’s licensing online at www.orea.ca.gov. The AR or AG licensing is higher qualified for difficult properties and AL is a minimum license for transactions under $1 million).
Have a Back Up Plan
Even if you’ve taken the prior steps, it’s best to know your options should the appraisal come in low:
• Order a second appraisal: Yes you’ll have to pay for this, but it may be worth it, especially if you have evidence to show the appraisal method was flawed or there are other mistakes you can identify and support. “Documenting specific issues will give you a better chance for the next to come in at the sales price,” said Dietrich.
• Proactively discuss “what if” scenarios with your agent: Plan for the possibility of a low appraisal by finding out if the seller is open to decreasing the asking price should a low appraisal happen, or determine if you will be able to secure cash to make up for the amount that the lender won’t cover in case of a low appraisal.
“Low appraisals from a hot housing market and real estate industry regulations are the new reality, and the best way to deal with them is to plan for any problems from the get-go,” Dietrich said.