If you are taking out a mortgage on a property, expect some form of an appraisal to take place prior to your closing date. The purpose of the appraisal is to satisfy the lender that the property in question is not falsely over-valued.
So why would a property not appraise in the first place? The agreed purchase price is well over market value, the appraiser finds an issue with the property that seriously impacts its value, or it could even be that the appraiser lacks experience or geographic competency (a nice way of saying that they don’t know the area very well). These are all real factors that come into play everyday in real estate transactions.
The first thing is to understand how the appraisal step fits into the entire process. A lender – your bank or mortgage company – will request an appraisal be done for a specific property through a third-party Appraisal Management Company (AMC). The role of the AMC is to provide an impartial opinion of value by one of their licensed appraisers to satisfy their strict lending practices and discourage sketchy business activities, such as mortgage fraud, etc.
The appraisal gap typically results from one of the following misconceptions: The buyer assumes that the price they’re willing to pay is adequate proof of the home’s value, or the seller assumes that their house really is worth a small fortune more than comparable properties and that the buyers will bring extra cash to the table if needed. Both viewpoints are off base.
There are times, however, when the buyer and seller have acted in good faith and the property still doesn’t appraise – so what next? The most important thing to keep in mind is that it’s just one person’s opinion and not all appraisals are going to come back the same. Here are four solutions:
1) Get a ‘reconsideration of value’ based on supplied sales data.
2) Pay for a second appraisal (banks and lenders only budget for one and the person you’re communicating with often doesn’t have enough clout to get a second one done).
3) Switch to a different lender.
4) Negotiate with the seller/buyer to save the deal.
Top tip: Work with an experienced agent who can help guide you, as a buyer or a seller, to come to a successful conclusion. Your agent should be well-connected and able to put you in touch with the right professionals to quickly solve all of these obstacles without losing your confidence or jeopardizing the deal!