Reader question: An appraisal killed our house sale. We accepted an offer on our house 45 days ago. The lender just turned down the buyer’s loan because the appraisal was $ 35,000 less than the contract price. The buyer had a 20% deposit but no extra money to make up the difference. We had good comparables, and our agent felt we were in the approximate stage. How can an appraiser be so low? When creating an assessment, what exactly happens?
Monty’s response: How an assessment is created:
The lender orders the appraisal. The lender engages the appraiser through a third party in order to avoid any collusion between the lender, the borrower or the appraiser. These third-party companies are called valuation management companies (AMCs). The appraiser works for the lender, not for the borrower. Foreclosures are expensive. The lender must make sure, as well as the secondary market (most often federal companies, such as Freddie Mac or Fannie Mae) that the value of the home is healthy.
The appraiser inspects the house to gather information. What does the sale price include? Age, condition, construction materials and much more should be observed and recorded.
The assessor records the facts in an assessment form. There are different shapes for different types of assessments. Here is a link to the Fannie Mae Single Family Form. The trained assessor has access to MLS and assessor data and has studied assessment theory and techniques. The appraiser should also practice under a seasoned appraiser before appraising without seasoned guidance.
They analyze all the information about the house and consider three different approaches to value; the cost approach, the revenue approach and the market approach. These approaches are considered and weighted according to their relevance to the topic. For example, the location of the property may be where no comparable location exists. The fact that there is no rental would mean that the income approach is not taken into account.
The assessor may discover a dozen or more potential adjustments. They make cost adjustments for differences in the characteristics of each comparable. For example, if a comparable has more square meters on the gross living area line, they receive a minus (-) amount to bring them back to topic. If the comparable is smaller than the subject, it gets the difference in square meters with a plus (+) to bring it to the subject. They clean up the pros and cons compared to this comparable selling price. It is at this point that the art, experience and science of the task come together with reason and judgment (and without emotion) to choose the last three or four comparables and assign the adjustments to each property.
Finally, the assessor should review each comparables to confirm that the neighborhood and structures are similar.
“An appraisal killed our house sale” is a common phrase and these are the reasons why. Examples could include your comparable sales exceeding the 12 month limit, non-comparable style, differences in square footage to large, and more. Another possibility may be that your agent made a mistake in his comparable choices. The best potential defense you can have is if the appraiser is wrong in their calculations. Lenders can authorize a second appraisal, which means more time and money.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home”. He advocates for industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty, or at DearMonty.com.