What If Your Home Doesn’t Appraise?

For home sellers and buyers alike, the appraisal process can be the last final hurdle before getting to the closing table. However, this important step in the process can often cause headache and frustration for those that don’t completely grasp the appraisal process.

Being on both sides of the transaction, I’ve seen a few appraisal issues arise and here is quick rundown of the ins and outs of this process.

First off, when a seller and their broker are determining a listing price for the home, the listing agent performs what is called a Comparative Market Analysis (CMA). The listing agent is determining a price range that the house should be sold at. The most efficient way of doing this is by looking at the sold prices of similar styled homes located within a relatively short geographic region.

As a realtor, I always try to use the formula that a bank-hired appraiser might use – this compares apples to apples in terms of style of house. Is the subject home a ranch home? Well then only looking for ranch style homes, not 2 story homes, bi-levels, etc. Then looking at homes within about 20% either way of above grade square feet (so excluding the basement). Most important is finding comparable home that are located close to the subject home – hopefully less than a mile away and in the same neighborhood. After finding comparable homes, making dollar amount adjustments for number of bedrooms, amenities, upgrades, garage style, etc to determine a value range.

On the flip side, as a buyer when you find a home that you are interested in making an offer, it’s imperative to ask your agent, “What are homes like this selling for?” This will help determine if the seller is over priced or right in line with the market. As with lots of things in life, there is no one exact price for a home.

So what do you do if your home doesn’t appraise?

As a seller you have a few options: you can ask that the buyer bring more cash to the closing table to make up for the price difference in the contract price and the price the appraiser gave the home (which is difficult to get done) or you can renegotiate the price with the buyer. As a seller, it’s important to remember it doesn’t matter how much you paid for the home, the cost of renovations you’ve added or how much profit you need in order to buy your next home. The appraiser was hired by the bank, which means they also work for the buyer. The bank does not want to lend on a home that is worth less than their loan amount.

As a buyer you have similar options: you can decide to bring additional cash to close to fill the gap, you can try to renegotiate the price with the seller, you can terminate the contract or you can challenge the appraisal. If the buyer decides to terminate the contract they will get their earnest money back so long as they have terminated by the date specified in the contract.

It’s important to note that challenging an appraisal can sometimes cost the buyer an additional fee. However, this is where an agent can really show their strength. If the broker can show that the appraiser used poor comparable properties or did a “drive by” appraisal and  didn’t actually enter the home, then there may be a chance to fight the value. If the home had a renovated kitchen then the appraiser may have completely missed that value added item.

HouseWith the market moving so fast lately, appraisal issues have become common. The cause for this is that an appraiser is using past historical values for a homes value and not always necessarily looks at appreciation values. This is why it’s important to look for the most recent sales. A house with the same floor plan and finishes that sold across the street from the subject property yesterday is obviously the best comparable possible. Of course we know that’s not always easy to find.

After the appraisal has passed, hopefully it’s smooth sailing until the closing table for buyer and seller! 🙂