Buyers, you can do everything right and wind up with no house. How can that happen? Low appraisals. In the next three entries, I will explain what happens during the appraisal process and why you need to care. Of all the people who suffer a broken deal because of a low appraisal, the ones I care about are the buyers, since I am a buyer’s agent.
The buyer suffers in these ways:
- By the time the appraisal is completed, the buyer has paid for an inspection, attorney’s fees for a Purchase and Sales Agreement, lenders fees for application and appraisal. This can be $2000 or more, depending on the house.
- By this time, the buyer has stopped house hunting for four or more weeks. If the buyer has a deadline, that is significant time lost.
- Sometimes the appraiser is wrong and the property is worth what the buyer is paying. Sometimes the appraiser is right; the buyer has overpaid.
In a rising market, timing matters. New purchases, at five or so percent above the prices from the year before, can cause an appraisal to come in low. In that case, the low appraisal hurts the buyer. But, buyers can lose their heads in a bidding war. As buyer’s agents, we want to discourage that. A low appraisal can show that the buyer chose to go too high.
When we work with clients in a rising market, we tell them where we think the grey area is. That’s the price point where an appraiser might consider the house too overpriced for the lender. Since buyer’s risk time and money if an appraisal fails, this is something they should know. Then the buyer must decide whether that risk is worth it. When a house has competitive offers, buyers frequently are making offers to accommodate that rise in market. This can backfire if the appraiser doesn’t think the market is as hot as the buyer does.
The best way buyers can arm themselves for a bidding war is with facts. A buyer’s agent should be supplying you with a Comparative Market Analysis and an explanation of the market conditions before they make an offer. That way, the buyer knows that an appraiser may consider the offer price too high, and cause a failed appraisal.
If an appraisal comes in low, sometimes, the underwriter will allow the mortgage if the buyers add more equity to their down payment. This is a point of decision for a buyer. If — now that the heat of bidding-war battle is over – the buyers believe they lost your head and overpaid, this is their chance to leave the transaction with their deposits intact. If they believe that the appraisal is wrong — that the appraiser is looking backwards in the market and not considering the upward price trend – then they can add to their equity, if they have the money to do so.