can stall, derail home sales
My nephew bought his first house not long ago,
but only after the deal was almost scuttled by a faulty appraisal.
The appraiser from the Veterans Administration didn't
notice that an addition had been built onto the house in Oak Harbor,
Ohio. He appraised the home's value based on the original square
footage listed in the county records. The appraisal report concluded
that the house was worth less than the price that the seller and
my nephew, J.R. Majewski, had informally agreed upon.
J.R.'s experience shows that an appraisal for less
than the price of the house doesn't have to derail a sale, although
In J.R.'s highly unusual case, the faulty appraisal
aided him. The owners were selling without a real estate agent and
were desperate to close the sale fast because they were having another
house built and needed the cash. J.R. was willing to pay $110,000,
but his banker told him not to sign a purchase agreement until the
appraisal came back.
When the appraised value came in at $97,300, the
sellers almost balked. Their harshly worded phone call to the appraiser
made things worse -- the appraiser refused to come back out. Instead
of putting up with a three- to four-week delay for another appraisal,
or searching for another willing buyer, they sold the house in Oak
Harbor, Ohio, to J.R. and his wife, Nikki, for $99,300 -- in effect,
a $10,700 discount. J.R. and Nikki borrowed $97,300 through a VA
loan and paid the $2,000 extra via gift money from family.
"The VA appraiser, as much of a jerk as
he was, actually helped me," J.R. says.
When you borrow money to buy a house, the lender requires an appraisal
-- a neutral expert's estimation of the home's fair market value.
The appraiser considers many factors, including the prices of comparable
homes that have been sold recently as well as the condition, size
and amenities of the property being appraised.
The lender requires an appraisal because it would
be bad business to unwittingly lend more than the house is worth.
In the vast majority of cases, everything is fine: The house is
appraised at or above the sale price and the loan goes through.
Occasionally, the appraisal is for less than the
home's selling price. What happens next depends upon how much of
a down payment the buyer plans to make.
If the buyer is going to make a sizable down payment,
the lender might not care about the low appraisal. For example,
if the sale price is $200,000, the appraisal comes in at $20,000
less than that, and the buyer is making a $100,000 down payment,
the bank will let it slide. "The risk is still low enough for
the bank to close on the transaction," says James Mason, sales
director for online lender MortgageIT.
Time's a factor
Why not dot the i's and cross the t's by getting another appraisal?
"Because everything takes time," including appraisals,
says Ellen Bitton, president and CEO of New York-based Park Avenue
Mortgage. In every real-estate transaction, time is of the essence.
The process works differently when the down payment
is small or nonexistent. If someone has $3,000 for a down payment
on a $100,000 house, and the appraised value comes in at $95,000,
that loan will not be approved. The bank won't lend $97,000 for
a house that an appraiser says is worth less than that, especially
if the buyer can scarcely scrape up a down payment.
"In the case where the appraiser has missed
something, the bank usually goes back to the appraisal company to
have them reevaluate," Mason says. Perhaps it's an obvious
error such as not noticing that an addition was built onto the house.
More likely, the problem stems from not finding the right "comps,"
or "comparables" -- prices of similar, nearby houses that
were sold within the last six months.
When is a comp not a comp?
In slow markets and rural areas, the appraiser might have trouble
finding comps, so the lender might ask the appraiser to look farther
away for examples of comparable homes, or to search farther back
in time -- up to 18 months ago instead of six months.
In very hot markets, the appraiser might be looking
at recent sales data that already are out of date because prices
are rising so fast. This happens because appraisers rely on county
records, which usually take two or more weeks to be updated. In
some super-hot areas on the coasts, home values can rise more than
20 percent a year, meaning that sales prices are out of date after
just a few weeks.
When the appraiser won't budge, or time is limited,
the buyer and seller have three options: Reduce the price, make
a bigger down payment, or nix the deal.
"It usually works out," says Diane Saatchi,
senior VP with the Corcoran Group in East Hampton, N.Y.. It's rare
for the agreed-upon price to truly be too high, she says, "because,
by definition, if somebody's willing to pay it, that's what it's