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Thinking of buying or selling a home?

Even when both sides agree on a price, the deal could fall apart thanks to an under-appraisal.

Here’s the increasingly common scenario: The seller lists the house for $325,000, the buyer offers $275,000 and they settle on a $300,000 sales price. A week before closing, the appraisal comes in at $265,000, the maximum upon which the bank or mortgage company is willing to lend.

Who’s going to make up the $35,000 shortfall?

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In the aforementioned scenario, the seller — having already come down — typically doesn’t want to drop the price further. The buyer may not have the available cash, or may not be willing to pay more than the appraised value.

Consequently, the wheels often fall off the deal.

What can cause a low appraisal

Short appraisals typically arise in a declining housing market because the lack of recent comparable area homes sales, or “comps,” making it difficult for appraisers to determine the current market value of a property.

When home sales slow, good comps “age” fast. Add foreclosures and short sales to the mix and appraisals can run all over the map.

The Home Valuation Code of Conduct, or HVCC, which went into effect in May 2009, compounded the problem. The HVCC prohibits Fannie Mae and Freddie Mac lenders from having direct contact with appraisers.

As a result, most lenders work through appraisal management companies, or AMCs, whose pool of residential appraisers includes those with limited training or little familiarity with the geographic area being appraised.

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How to protect yourself

How can you protect yourself from low appraisals? Here are some suggestions for buyers and sellers.

If you’re a buyer:

  • Tell your lender to find an appraiser who comes from your county, or perhaps a neighboring county. After all, you’re paying him or her.
  • Request that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute’s senior residential appraiser, or SRA, or member of the Appraisal Institute, or MAI, designations.
  • Meet the appraiser when he or she inspects the home and share your knowledge of recent short sales and foreclosures that might skew the comps. You can speak with your appraiser; the prohibition only applies to your lender.

If you’re a seller:

  • Get an appraisal before you list a home. Search for a qualified appraiser in your area on the Appraisal Institute site.
  • Use the appraisal to set a realistic listing price for your home.
  • Give a copy of your prelisting appraisal to the buyer’s appraiser.
  • Question a low appraisal. There’s always a chance the appraiser or a supervisor will take into account new or overlooked information.

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