How to Get a Better Appraisal
When a home goes on the market today, it is common to receive multiple offers the first few days it is listed. Buyers looking for homes are finding this to be a frustrating experience. There are a limited number of homes on the market to choose from and only a handful of new listings entering the market each week. Most buyers are making offers on several homes before they get an offer accepted. Buyers are becoming competitive in making their offers as attractive to a seller as possible in order to give their contact the best chance to be the one accepted by the seller. Buyers are offering list price or more, buying properties in “as is” condition and agreeing up front to not to ask for any repairs. The National Association of Realtors reports that each month 10 to 20 percent of their real estate agents report that a home sale has gone bad due to a low appraisal.
In our local market, this is becoming an increasingly common occurrence. During the past week alone, I have had two appraisals come in $15,000 and $25,000 under the contract price. The Arizona Real Estate Purchase Contract has a contingency that the appraisal must come in at the contract price or more. If the appraisal comes in lower, the buyer can do one of the following: 1) cancel the contract, 2) pay the difference between the appraisal and contract price in cash, 3) negotiate with the seller to lower the contract/sales price, or 4) meet somewhere in the middle. Since buyers are under so much pressure to secure a home in this “sellers” market environment, we are seeing more buyers come up with the additional cash necessary to successfully complete their purchase of the home. Sellers are more likely to accept cash offers or offers from buyers that have cash reserves in case the appraisal falls short. This gives cash and cash-heavy buyers an advantage and is unfortunate for first time home buyers or those that are scraping by to come up with the minimum down payment in efforts to buy a home. A cash sale does not require an appraisal and buyers with extra cash on hand have the ability to pay above the appraised amount. Low appraisals hurt both buyers and sellers. Buyers can’t qualify for a mortgage without a good appraisal and sellers sometimes have to accept less for their home if it comes in too low. Low appraisals keep the overall values of neighborhoods from appreciating because they are based on comparable sales that closed in the past and are not representative of the escalating values in the current environment.
A few years ago, the Federal Government created an agency to control the residential appraisals by inserting a third party agency called “appraisal management companies.” These companies were created because the government believed that in the past, real estate agents applied pressure on appraisers to get the values of homes to come in high in efforts to get a sale closed. The government believed that the appraisers would come in with high values in efforts to continue to get business and more referrals from the real estate industry. While there could be some truth to this, what has happened as a result is the quality of appraisals has suffered and it is having a negative effect on buyers, sellers and the market. Appraisers already have the pressure to skew numbers downward, and to be as conservative as possible out of fear that they will get into trouble if they come in high and that high appraisal results in a loan that goes into default. The addition of a third party management company has lowered the quality of appraisals because of the added cost for their services require appraisers to work for lower fees. These lower fees being offered to appraisers attract lesser-qualified appraisers, and because they are being paid less per job, they have to do more jobs in order to make the same income. This requires them to take on a larger workload, which gives them less time to spend on each property, time that is necessary to do a thorough job. Properties should be carefully researched to make sure they are indeed comparable to the subject being appraised.
Before the creation of appraisal management companies, I received calls on a weekly basis from appraisers asking detailed questions on properties I had listed and sold in efforts to do a diligent job on an appraisal. Appraisers do not have the ability to physically look inside these sold homes to really know what they are comparing the subject property to. Agents that were involved in the sale of these properties can give valuable information to the appraiser to help them make good decisions and adjustments of the comparable sales they to use in their analysis. Since the creation of the third party management company, I rarely receive calls from appraisers asking questions. Some appraisers, in order to increase their volume, will go to geographic areas outside of their expertise. It is important for the appraiser to be an expert in the market they are appraising in.
It is very important to know what can be done to improve your home appraisal. Work with a real estate agent that is an expert in your market; someone who knows the inventory of homes that have sold and/or are currently active in your market. Your real estate agent should meet the appraiser and provide a complete list of comparable sales in your area. The owner should put together a list of all improvements and upgrades made to the home and the cost of these improvements, especially ones that can’t be seen like insulation, plumbing, etc. This should be provided to the appraiser as well along with copies of multiple offers or any back up offers that were made on the property. These act as more evidence to the appraiser as to the market value of the home. Other items include an inspection report, if one has been done, and any improvements that are going on in the neighborhood like new schools or parks. Finally, do not follow the appraiser around while he is doing his job.
In the current market it is more important than ever to sell the house twice, once to the buyer and then again to the appraiser. Consult your real estate professional and follow the tips outlined here to help improve your home appraisal and get your home successfully sold.