What Can Hurt An Appraisal
A successful real estate transaction is something like solving a Rubic's Cube. If you just pick up the cube for the first time it is confusing, and without knowing the formulas, it can be almost impossible to get all of the sides completely solved. If you have learned the formulas for solving the cube however, it becomes much easier, and you realize that everything works well once you understand the process. Just as not following one of the formulas correctly can keep you from solving the cube, having one missing process correctly in place can cause a real estate transaction to fail. The home appraisal is one of the challanges that both home buyers and sellers face. The first step is in accepting that an appraisal is not the same as the home inspection. While the appraisal may not be as thorough an inspection of the property itself as the home inspection provides, it may very well be more problematic. Understanding issues that can often affect an appraisal is the best way to have problems taken care of before the appraiser inspects the home, increasing the chances for a positive outcome.
Repairs Cited By Bank Appraiser
Often if there is a problem with an appraisal it stems from needed repairs in the home. As mentioned, the appraiser is not doing a home inspection, however they are looking for issues that need to be addressed. The appraiser will have guidelines that may differ between the various types of financing, such as FHA and VA loans. These types of government loans will have tougher requirements than a conventional loan may have.
Paint Peeling or Damaged
Peeling paint is especially notated in homes built prior to 1978, in which the paint may be lead based. For homes built in those years, the appraiser will pay close attention to paint on both exterior and interior walls, as well as windows to verify there is no peeling. In most cases this will have to be remedied before the loan can be processed. If the current season or climate is not condusive to painting, the mortgage lender may agree to have money placed in escrot until the climate will permit the repairs to be done. For example if a home is being purchased in winter in an area with heavy snowfall, the buyer may be granted putting off the repairs until spring as long as the money is kept in escrow to cover the expenses.
Safety is always a concern, and handrails are required with most mortgages if there are more than three steps. This being the case, a seller may need to install handrails on porch or deck steps to remove this appraisal issue.
Replacing or repairing a roof can be one of the most costly issues a home owner faces. Based on the potential expense incurred from replacing a roof the appraiser will be sure to inspect the roofs condition. Most types of mortgages will require that a roof has at least 3 years life expectancy left. If the appraiser is not able to confirm this, they may require having a roof certification completed by a roofing contractor before the closing date as evidence that the roof has the longevity mandated by the lender.
Broken Windows or Glass
While the appraiser will not typically inspect to see if windows open and close correctly, broken or missing glass is a common issue cited in an appraisal. As a Realtor, I would never recommend that someone make an offer on a property that has this type of damage without specifying in the purchase and sale agreement stipulations that these repairs need to be made prior to the appraisal date.
Heating and Cooling Issues
The appraiser, as well as the home inspector will verify that the air conditioning and heating units work. Just as is true with roof repairs, HVAC problems can be very costly to repair, and ensuring they function properly is imparative for the mortgage lender. Communicate well with the home inspector, as that will take place before the appraisal, and make sure that emphasis is placed on the heating and air conditioning systems early on to avoid any surprises later that could affect the loan process.
Electrical System Inadequate for Home
As with the heating and air, the electrical systems of the home should be a primary focus during the home inspection to avoid unexpected issues from coming up during the appraisal. Ask the inspector if the homes amperage levels are adequate, and find out if the home is on either an older 60 amp system, or uses fuses, as these could be troublesome during the appraisal.
What If The House Appraises Under The Purchase Price?
Possibly the toughest obstacle a buyer can face during the home buying process is finding out the property has appraised for lower than the purchase price. The mortgage company needs to be positive that the value of the house is equal to or greater than the amount agreed upon between the buyer and seller in the purchase and sale agreement. These are some of the potential scenarios that could happen, and suggestions for if they do occur.
Contesting The Appraisal
It is unusual for a mortgage company to agree to having a second appraisal done. Keep in mind that in asking for a new appraisal, you are in essence implying that the initial appraiser reported incorrectly. Working with an experienced agent can be very beneficial in this scenario as the agent can approach the appraisal on your behalf to determine if there are any issues that can be addressed to improve the appraisal, and possibly to present the appraisal with an updated CMA.
Reduction Of The Sale Price To Match The Appraisal
Asking the seller to reduce their price to meet the appraisal value can be uncomfortable for both the buyer and the seller, but the seller will need to accept at this point that their property is no valued as highly as initially anticipated. Please keep in mind that a seller will not be able to lower the price if they do not have enough equity in the property to cover the decrease.
Buyer Funding Of The Difference
If the buyer has decided that they are willing to continue with the transaction, and the seller is unable to lower the price, the buyer can opt to pay the difference between the purchase price and the appraisal themselves. This situation does not happen often as the buyer would have to want to pay more for the house than the appraisal is saying it is worth, essentially losing equity from the start. Usually if this happens, it can be attributed to low inventory in a sellers market, and the buyer being in a position of not being able to wait until they are able to find another house that meets their needs.
Renegotiations To Split Difference With Seller
Possibly the most amicable way to overcome a low appraisal is for the buyer and seller to agree to split the difference. Basically all parties would re-enter negotiations to see if they can come to an agreement between buyer, seller, and mortgage lender that is acceptable.
Needing a mortgage loan is a fact of life for most home buyers, and the appraisal is a part of that process that we have to accept. The appraiser is hired by the bank or mortgage company to protect their interest by ensuring their investment will have enough value to justify the amount they are lending. The several years of instability in the housing market has made this this even more important to lenders. While it can be frustrating during the home buying transaction, it is an essential system in place lower the risk of facing a market full of underwater prices. Working with your Realtor, and home inspectors will provide the information needed to address any of these issues before the appraisal is completed, and should reduce the chances of receiving a low appraisal.