Appraisal Version of “Garbage In, Garbage Out”
Homes under contract that don’t appraise have been a big issue in the Twin Cities housing market all Spring. See also, Jim Buchta’s “Low Home Appraisals Hold Down Area Values” in this past weekend’s Star Tribune.
What is the most common reason?
A. Multiple offers drove the price above established Comp’s;
B. The appraiser was inexperienced and/or working in an unfamiliar area;
C. Nearby foreclosures or short sales torpedoed the home’s value — even though it was neither;
D. The appraiser had the wrong sales price.
Answer: credit given for all of the above, but “D.” is the best answer.
Overlooked in all the “big” reasons homes fail to appraise is an innocuous one: the appraiser was working off the wrong sales price.
How could that happen?
In the course of resolving inspection issues, the Buyer and Seller agreed to reduce the price.
However, the Addendum with the new, lower price never made it to the appraiser.
Because appraisals are typically Pass-Fail — the appraiser’s job is to support the loan amount, vs. determining the home’s fair market value — the appraiser couldn’t support the (incorrect) sales price, and “failed” the home.
Working With Appraisers — Then & Now
Once upon a time, listing agents didn’t interact with appraisers; the housing market was rising, and everything appraised.
As foreclosures and short sales started to pop up, valuations became tougher, and proactive agents learned to supply the appraiser with three good Comp’s (“Comparable Sold Properties”).
Today, the challenge for listing agents is often not which properties the Appraiser should include, but which (harmful) properties they should exclude.
That’s because appraisers can’t simply skip a nearby property that doesn’t support the subject home’s value.
Rather, they must be able to distinguish it based on condition, updates, floor plan, legal status, etc.
Which is where the listing agent and their superior market knowledge can be critical.