So, you’ve got a fully executed contract on a home. Congratulations. Now you will play the waiting game to find out if the home will appraise at the sales price.
These days it is getting harder and harder to know what value the home will be given. Appraisers are often faced with the problem of not finding enough relevant closed sales within a one mile radius. When this occurs they often consider listing prices, but they are also hit or miss, as many sellers overestimate the value of their homes.
Sometimes appraisers will attempt to secure a contract price from a Pending Sale, however most Realtors will not give up that information and many times the Pending Sales never close.
What happens if a lender rejects an appraisal? They can offer a second appraisal (usually at the buyers expense), the Seller can reduce the price of the home or the Buyer can come up with more cash. Many times none of these remedies takes place and the sale doesn’t go through.
When the comparable sales are too old to use for the appraisal, another method has been used called “negative time adjustment”. If prices are falling at an annualized rate of 12% and there is a relevant sale that occured 4 months ago for $300,000, the comp can be devalued by 4% to indicate market decline.
There is also an option called an Automated Valuation Model, which is known as an AVM. That is what you find on Zillow.com and other real estate websites. It is a mathematical formula which examines the sales prices, square footage and recently sold homes. It is usually not up to date and it doesn’t take into account the homes condition, appearance, upgrades or lot location.
Appraisers are being called upon to use every possible method available to not only help home sales but also those who are also refinancing their home. On February 18th, President Obama announced the Homeowner Affordability and Stability Plan which is suppposed to help reduce foreclosures and stimulate housing demand. Under the plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. If the the buyer owes more than 105% of the value of the home they won’t qualify.
It is certainly an interesting time for Appraisers and I do not envy their job one bit.