the recent appreciate in real estate values, are you seeing more homes appraise
for less than the sale price?
Answer: As we saw in last week’s column, the Arlington real estate market has appreciated rapidly over the last six months which increases the chances that an Appraiser cannot find past sales to support the price the buyer and seller have agreed to, thus increasing the amount of low appraisals in Arlington over the last six months (unfortunately there’s no data to back that up so it’s based on what I’ve seen and heard in the market). Generally, appraisal values lag behind actual market appreciation by a few months.
Banks Often Require
If a buyer is getting a mortgage, the bank almost always
requires a third-party appraisal to assess the property’s market value. While
one can easily make the argument that the price the buyer and seller have
agreed to is the market value, banks don’t look at it that way, hence the
Appraisals are largely based on comparable home sales over the last six months. It’s a common myth that Appraisers can only use sales from the last six months, but more recent sales are given more weight than sales 6+ months ago. Ultimately, it’s the Appraisers job to determine the market value of a home using the best available information.
Impact of a Low
If the appraised value comes in at or above the purchase
price, all is good in the eyes of the bank so things continue as planned (note:
a higher appraised value has no impact on your assessed value for tax
If the appraised value is lower than the purchase price, the
bank usually requires you to negotiate a reduced sale price to match the
appraised value or put more money down to cover the difference between the sale
price and appraised value, multiplied by your loan-to-value (LTV) ratio. In
some cases, you can also change the type of loan you’re using to satisfy the
The easiest way to calculate LTV is subtract your down
payment percentage from 100%. In other words, if you’re putting 20% down, your
LTV is 80%. If there’s a $10,000 difference between the sale price and
appraised value, you’ll usually be required to bring an extra $8,000
($10,000*.8) to the table.
All of this can change depending on your loan program and down payment, so it’s important to understand the impact a low appraisal will have on your deal prior to making an offer.
Protection Through An
The Appraisal Contingency is one of the “Big Three”
contingencies that are common to sales contracts in Northern Virginia. The Home
Inspection and Financing Contingencies are the other two.
The Appraisal Contingency gives buyers an out, with a full
return of their Deposit, in the event the appraisal is below the sale price and
the seller is unwilling to reduce the sale price or the buyer is unwilling to
make up the difference or change loan products.
If you include an Appraisal Contingency in your offer, it’s a good idea to ask your lender how long it will take to order and complete the appraisal so you can structure the contingency period around that timeline. Remember, shorter contingency periods are more attractive to sellers and longer periods generally favor the buyer.
When To Waive The
waiving an Appraisal Contingency is the right strategic decision when making an
offer. If you’re competing against other offers, especially if they’re cash (no
appraisal needed), you should talk with your agent and lender about the risk
and reward of giving up this protection. In some cases, sellers will choose an
offer with less risk (fewer or no contingencies) instead of the highest offer,
especially when the sale price is well above recent comparable sales.
Removing the Appraisal Contingency altogether isn’t your only option either. There are ways to reduce the seller’s risk exposure, thus making your offer more competitive, while also limiting your risk exposure in the event of a really low appraisal.
Disputing a Low Appraisal
If you disagree with the appraised
value, ask your lender about the dispute process. First review the appraisal
report to understand what sales and details the Appraiser used to determine the
value. The best chance you have at getting an appraisal adjustment is to
provide the Appraiser with different sales that more accurately represent the
subject property’s value, with an explanation.
risk/contingencies is one of many strategic decisions you’ll make as a buyer or
that you’ll have to assess as a seller. Don’t hesitate to reach out to me by
email at Eli@EliResidential.com if
you have any additional questions!