It’s competitive and stressful enough for homebuyers in this market. While waiving the home appraisal contingency can strengthen an offer, it can also increase nerves during escrow. For every offer I’ve written on behalf of my clients this year, we have either waived the appraisal contingency entirely in our initial offer or had it countered out in a response to our offer. If the appraisal comes in low, there are usually a number of variables that contribute. Let’s take a look at what an appraiser looks at, why one can come in low, and what to do in that case.
The Appraiser’s Job
An appraiser will look at the home in escrow and assess its condition. Appraisers must be qualified and certified by the state. Depending on the condition of the home, the appraisal can be a quick 20-minute visit or a two-hour examination. Among the characteristics that contribute to the appraised value:
· The home’s dimensions and year the home was built
· Neighborhood characteristics, including zoning classification
Construction details: type of foundation, if you have a basement or attic, type of driveway, car storage, materials of the interior walls and floors
Utilities and amenities: whether you have public utilities or other off-site improvements (and whether these are typical for the market area), whether you have a fireplace or patio, features such as energy-efficient appliances, types of plumbing, and lighting fixtures
General condition and any needed repairs
Once the visit to the home is complete and the details are recorded, the appraiser will search for similar sales in the area within the past few months to create an opinion of the home’s fair market value. This report is drafted for the lender and takes about a week to complete.
Why an Appraisal Comes in Low
All of the above variables leave a lot of room for an appraisal to come in low. The home could be less updated than others in the area; it could have one less bedroom or bathroom, or perhaps it needs a new roof. And sometimes, the appraiser may not be as familiar with the area and may have not considered the appropriate comparable sales.
In today’s market in Los Angeles, however, the most likely reason is that the market is moving faster than normal. Competition has been fierce and prices have been driving the market up. But if those comparable sales haven’t closed yet, they’re not generally considered as markers of value by the appraiser. In Los Angeles these days, homes are going into escrow after less than one week on the market. Buyers are writing offers on many homes just to win on one. With tight contingencies, sometimes time just isn’t on their side when it comes to the appraiser’s assessment of the home.
Can an Agent Influence the Appraisal?
Home sellers, buyers, and realtors are setting the market; not the banks. On our end, we’re pushing the market higher and higher. While the appraiser is the final word when it comes to the bank, it’s our job as agents to arm them with as much ammunition. Even when buyers have waived their appraisal contingency, all parties involved benefit when the home appraises for the amount the buyers offered. Typically the listing agent will meet with the appraiser and present comps. In some cases, the listing agent will allow the buyer’s agent to be involved. This is not customary and is much appreciated in this market. Since we, as agents, have seen most of the comparable homes in the area, we can make a case to the appraiser to use specific comps. The seller can also provide receipts and specific descriptions of all the upgrades they’ve done to the home. By respecting the appraiser’s job, and sharing only information that is really relevant to the home, the agent’s input may garner more consideration.
What To Do If The Appraisal Comes in Low
There are a few options. The first is to look for errors in the appraisal and challenge it if need be. Errors would include size, bedroom count, materials, used, condition of the home, etc. These would need to be factual inaccuracies in order to be appealed. You can request a second appraisal if necessary.
In the Los Angeles market today, buyers, unfortunately, do not have as many options. They can
· Make up the difference in the down payment.
· Lower the down payment and pay Private Mortgage Insurance on the difference between that amount and 20%. Considering how fast the market is moving, your appraised value could increase quickly, eliminating the need to pay that PMI for long. This option is something that buyers should discuss with their lenders, as the lenders are the only ones who can facilitate such a deal.
· Negotiate with the Seller: Depending on how much higher your offer was than the one right behind you, the seller may be willing to negotiate a little on the home’s price, or to cover the buyer’s closing costs, but in this market, there’s no guarantee.
· Walk-Away: As a last resort, the buyer could cancel the deal. But once a buyer has fallen in love with a home, the last thing they want to do is walk away because of an appraisal that comes in too low.
If you find yourself in this situation as a buyer, it’s important to consider all of your options without emotion involved. Explore your options with your lender, your agent, and the seller’s agent. Remember, all parties involved want the transaction to close.
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