One of the challenges of an improving real estate market is rising prices. When prices rise, the supply and demand curve supports those rising prices. As a result, appraisals often come in short, or lower than the purchase price.
When that happens, the buyer usually has the option to cancel the contract. A renegotiation can also ensue where either the buyer or the seller comes up with the difference to move the sale along.
To clarify, an appraisal is a form of protection for both buyers and the bank. For buyers, it’s to stop them from overpaying for a home. For banks, it’s to keep them from handing out a larger loan than necessary. If you make an offer on a home and it doesn’t appraise, you’re not obligated to move forward.
One important thing to note about the appraisal process is there are certain loan products, like the FHA loan, where the appraisal attaches to the property. By this I mean for a period of time, the appraisal stays with the property.
For example, let’s say an appraisal comes in short from a buyer on a specific property, they decide to cancel, and the seller puts the home back on the market. That appraisal then stays on file, and any subsequent buyer that comes along during that time period with an FHA mortgage would be relegated to that same appraisal number. If you’re a seller looking to cancel a contract and you know the home you’re selling is very likely to be bought by another FHA buyer, you might have to wait until that appraisal expires or someone else comes along with a different loan product.
Depending on the loan product, the buyer has the right to choose a new lender with a new appraiser.
It’s important to remember that although appraisers are heavily trained professionals with lots of credentials, their opinions on the value of a property can differ. As the industry has changed, their role has changed as well. For a time, there was pressure to bring appraisal prices down, and that caused some of the best appraisers to do other things.
In addition to having the right to cancel the contract or pursue negotiations, the buyer can also change lenders. A new lender with a new appraiser could see the value completely differently. In that case, you’re generally looking at a delayed closing, but that’s something that can be done to keep a deal under contract at the original purchase price.
Years ago, shady things like cozy relationships between appraisers and lenders tended to form whenever homes needed to be appraised. Now, though, federal guidelines and regulations have changed so lenders don’t have as much one-on-one communication with appraisers.
In my opinion, local lenders are better because they not only have a firmer pulse on the market, but they also do a more thorough job of giving a solid value that can be verified by solid data instead of giving a high or low appraisal just to get a loan through.
If you have any more questions about appraisals or any other real estate topic, please feel free to reach out to us. We’d be happy to help.