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In recent years, we have seen homebuyers pay prices that are higher than both the seller’s asking price and appraised values. Beginning in January 2020, 7% of home purchases had a contract price above the appraisal, according to housing data provider CoreLogic. That frequency increased to 19% by May of 2021.
On the other hand, the likelihood of an appraisal exceeding the purchase price dropped from 69% in January 2020 to 52% in just one year.
From 24% to 29%, there were relatively few instances where the appraised value and the contract sales price agreed upon each other.
According to Paul Grossmeier, CEO of Grossmeier Appraisal Service, LLC, in Mukwonago, Wisconsin, who has been appraising real estate for over 30 years, buyers are still making offers “above and beyond asking” in Wisconsin. ”.
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Trends and changing market conditions
Grossmeier’s observations are supported by a 2022 NAR Home Buyers and Sellers Generational Trends survey. It notes that 29% of buyers continue to pay a premium over the asking price. According to HomeLight’s Buyer and Seller Insights Report for 2022, sellers actually made the decision to sell in important markets like Phoenix, Sacramento, and Denver specifically because of the high cost of homes.
Nevertheless, predictions through the end of 2022 signal lower house prices due to additional inventory and higher mortgage rates, which should lessen the appraisal gap and the workload for the appraisers.
One factor in maintaining this trend is the shortage of homes, which raised the CoreLogic Home Price Index to 15% in May 2022.
That gap might start to close in 2022, when home prices are expected to level off, according to experts. A delay in comps that support a higher appraisal can, however, be problematic for buyers eager to snag a sale before someone else bids higher and secures it in a fast-moving seller’s market with ongoing inventory shortages.
This article will highlight the elements that directly affect your home’s appraisal and offer 10 professional suggestions to increase the likelihood that your home will appraise for its asking price. Additionally, we’ll provide some professional advice on what you can do if the appraised value of your house is less than the asking price.
When does a home appraisal happen and why?
According to the Appraisal Institute, the nation’s largest professional association of real estate appraisers, whenever a buyer is financing the purchase of a home or refinancing a mortgage, an appraisal of the property is typically necessary to ensure the lender that the loan-to-value (LTV) ratio meets their underwriting guidelines.
Lenders want assurance that the buyer isn’t over-borrowing since the home serves as collateral for the mortgage. If the borrower defaults on the mortgage, the lender wants protection against lending more than it might be able to recover.
A licensed or certified appraiser who is unbiased and qualified is involved in the appraisal process. The appraiser gathers data and information to ascertain the value of the property. Some of the factors under consideration include:
An appraiser must consider additional criteria for FHA and VA loans, the majority of which are related to safety and soundness.
To determine your home’s current market value, appraisers use a comparative market analysis (CMA), which includes a pool of recently sold comparable homes (also known as “comps” for short), that are similar to your home in size, square footage, number of beds and baths, and location. They compare their findings with appraisal and market data, such as Fannie Mae’s Collateral Underwriter.
Grossmeier explains that appraisers use historical data to estimate present-day value. He often consults the Marshall & Swift Residential Cost Handbook, which provides historical cost indices for a wide variety of housing styles, the classifications for building quality, corresponding descriptions, and example photographs.
However, more recent data is preferred over historical data in the ever-changing market. Appraisal Management Companies (AMC) now prefer sales within the last 90 days rather than the previous six months, according to Holly Mitchell, a top agent who closes 11% more deals than the typical Yarmouth, Maine, agent. “It’s all about time – what’s happening right now. ”.
Most AMCs want to see the most recent three closed sales to accurately reflect market conditions, but a maximum of 90 days helps remove seasonality from sales, Mitchell continues.
Are low appraisals common?
According to Megan Walters, a top-rated agent in her Columbia, Missouri, market who sells homes 40% quicker than the average agent, “you can’t always avoid [a low appraisal].”
Most appraisals come in at the right price. In general, only 8% of appraisals, according to Fannie Mae, come in below contract.
To get a good idea of how much your house will appraise for and whether it will appraise for (at least) the purchase price, start by using HomeLight’s Home Value Estimator. You can get a rough estimate of what your home may be currently worth in just two minutes and seven questions.
What can cause my home to appraise low?
Many factors can result in a low appraisal. Your home might not appraise as well as you’d like for a variety of reasons, including:
A weak housing market is the result of a sharp decline in value (like in 2008). Lack of quality comps in cold markets with excess inventory and few buyers makes it challenging to determine your home’s true market value.
Rising market, when turnover is too fast for comparable properties to keep pace The market is moving too quickly at the moment, says Walters. Low appraisals happen in markets where prices are rising, but appraised home values aren’t keeping up with how quickly homes are selling or the higher prices they command, resulting in lower appraised values that don’t reflect the change in the industry.
Because appraisals on comparable properties may have closed before the market changed, low appraisals are typical in a hot seller’s market. For instance, a National Association of Realtors survey found that the median number of days a home was on the market in June 2022 was only 14.
Because of the dearth of available inventory, according to Grossmeier, it is difficult to determine the rate of appreciation. He claims that some appraisers might overestimate the value when basing an appraisal on the most recent sales that are available. To account for data lags, they should make a “time adjustment,” though.
Another reason for the data lag, according to Mitchell, is that “towns and cities are back up on records” or that they are awaiting tax declarations. Thus, sales aren’t getting recorded.
In addition to lagging sales data that can lead to low appraisals, a seller’s market’s limited supply of homes, which occasionally results in bidding wars, can raise prices.
Appraisers with limited experience or unfamiliarity with the local market If an appraiser is inexperienced and hasn’t written an appraisal for a property similar to yours, it might yield a low valuation. Similar to this, if the appraiser is overworked and covering a large area, they might not be familiar with local market details that could increase the value of your home.
“An appraiser needs to know the local market,” Grossmeier insists. He advises the appraiser to choose recent sales in the “most similar municipal setting possible” to generate strong comps because they would appeal to the same market segment.
There’s an appraiser shortage. A greater number of people want to buy or refinance real estate when interest rates decline. Due to the increased workload, appraisers may find it difficult to keep up.
When compared to CPAs during tax season, Grossmeier says, “the pipeline is only so big.” “There aren’t enough tax preparers available if you need them every week.” But he also points out that there are sufficient appraisers to handle “normal volume. It hasn’t been a typical year in about three years because of low interest rates and declining inventory. That has sparked a rush for both refinances and the purchase of new homes. “It’s like during the pandemic when there weren’t enough nurses. ”.
Therefore, some appraisers turned to “drive-by appraisals,” or exterior-only appraisals, which can be less accurate than traditional appraisals. Similarly, to save time, some appraisers conduct “desktop appraisals” that don’t require a site visit at all, relying instead on public records and Google street view. The Federal Housing Finance Agency (FHFA) announced in October 2021 that banks and mortgage lenders can replace traditional appraisals with desktop appraisals for Fannie Mae- and Freddie Mac-backed mortgages.
Some sellers didn’t want appraisers in their homes during the pandemic’s peak. Mitchell claims that instead, in order to increase the accuracy of an appraisal, they sent time-stamped pictures of their homes along with cost and improvement lists to appraisers.
Grossmeier still visits the properties he’s appraising. “There is a difference between seeing a high-quality home in person and seeing pictures of one,” He dislikes relying on other data sources and passing motorists’ terminology because there are too many inconsistencies.
Bad comps. Perhaps there was a foreclosure or a flip nearby. Maybe a good comparable wasn’t noted when your home was appraised.
No comps. Despite Walters’ claim that lacking comparable sales can harm your appraisal, the majority of appraisers are able to locate something. The question is, how comparable is it?.
You haven’t kept up with maintenance so the house is in poor condition. If you skip routine maintenance, your house could lose 10% of its value.
Your home was over-improved for the area. You might not get a good return on your investment if your home has too many upgrades, additions, or renovations, especially if you’ve only recently moved in. Although excessive improvements may draw buyers, don’t count on them to cover the full cost of the work you’ve done on your house.
Price was set too high. “Price is key,” Walters insists. Due to the “endowment effect,” an emotional bias that causes you to value something more highly than its actual value, some homeowners overprice their own homes.
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10 expert tips to help avoid a low valuation
You can take certain steps to ensure that your appraisal accurately depicts the value of your house. Be proactive.
Make a list of features and recent improvements you’ve made to the property
Paul Fonseca, a top-selling agent in Fort Myers, Florida, with 27 years of experience, claims that appraisers frequently inspect air conditioners and check the age of the unit or the permits when they pull permits. But when you tell them, “This was just installed, and it’s a Trane air conditioner, and it cost $7,000, it’s different. ”.
Provide maintenance records
Neglecting routine maintenance can negatively impact the sales price. Santiago Valdez, a top-selling Chicago agent who has sold 68% more properties than his competitors, advises showing before-and-after photos, receipts, and renovation paperwork to the appraiser to show that you are on top of things and to help the appraiser adjust values appropriately.
Get a comparative market analysis
“It’s basically a free appraisal,” Walters says. Real estate agents compile a list of sales of homes similar in age, size, and style, typically within one mile of your home, for a comparative market analysis. This document lists averages and the location of your home within the sales price range. “It’s a good tool for pricing. ”.
Get a pre-listing appraisal
Grossmeier says, “Sellers can have an appraisal done before they list their house.” According to him, conducting a pre-listing appraisal will provide them with an EPO (easy price option) that will show a value range based on recent data. This can be crucial for unique properties with few comparables, but Walters advises her clients not to spend more money on the average home with many comparables.
However, Madalyn Suits says she only suggests a pre-listing appraisal on distinctive properties that are challenging to find comps for or when she anticipates “a huge problem” because she works with over 84% more single-family homes than the typical Atlanta, Georgia, agent. ”.
Check that the appraiser is highly qualified
The buyer’s lender usually requests an independent appraisal through AMC, which selects the appraiser. However, you still want to make sure the person is a qualified appraiser with a designation from a recognized professional appraiser organization. The appraiser should be licensed or certified by the state.
Suits is familiar with the advantages and disadvantages of the various appraisers who operate in her Georgia market. She occasionally advises sellers to select a buyer based on the appraiser in cases of multiple offers.
Provide a list of comps
Your agent will put together a package of helpful data for the appraiser, which will include a list of recent comparable sales in your area. The onus is on the listing agent to present comparable sales, according to Suits.
Mitchell concurs. “Our job is to defend the price. The agent already has the comps. ”.
Provide a CMA or pre-listing appraisal
“Ninety percent of our work is research,” Grossmeier reveals. “Appraisers provide a realistic value supported by the market. Why not share your documentation with them to help make their job a little easier?
Make sure your home is clean and tidy
Officially, it has no impact on the assessed value of your home, but keeping it clean and organized can facilitate access and highlight features more effectively. Top-selling Atlanta real estate agent Tamara Bourne concentrates on painting, power washing, improving curb appeal, decluttering, and depersonalizing homes in order to sell 84% more homes than her competitors.
In Bourne’s opinion, these five aspects of home preparation have been crucial to the success of her evaluations. She emphasizes, “Our homes appraise — period. ”.
Learn how different loan requirements can impact an appraisal
There are stricter appraisal requirements for FHA and VA loans, as well as different underwriting standards. There may be a need to replace single pull-chain light bulb sockets in a closet, crawlspace, or attic, as well as other specific requirements like the need to pay more attention to wood rot and earth-to-wood contact.
The different government agency appraisal requirements vary slightly. To see a comprehensive overview of the FHA loan requirements, HUD provides a 21-page handbook on appraisal guidelines.
Know your options for challenging a low appraisal
As Walters notes, it can be challenging to contest a low appraisal because “the seller won’t know the appraised value.” According to the Consumer Financial Protection Bureau, this is because the lender hires the appraiser and is required by federal law to give a copy of the appraisal report to the buyer, not the seller.
Sellers should have their agents go over it, Suits urges. The buyer’s agent must provide the seller’s agent with a copy of the report upon request. The seller’s agent can then get in touch with the lender to provide documentation supporting the seller’s claims regarding the property if there are any errors, omitted features, or incorrect information.
Requesting a reconsideration of value (ROV), which enables the seller or buyer to appeal to the lender challenging the property value determined by the appraiser, can be a part of the challenge process. The ROV enables each party to draw attention to any errors they believe to exist in the appraisal report.
“The challenge is not to offend,” Mitchell believes. “There’s a protocol to refute [an appraisal]. ”.
She claims that an appraiser rarely modifies the value. However, if new comparable sales arrived too late to be included in the initial appraisal, it may be possible to order an updated appraisal.
The most important thing, says Suits, “is to be ready with the numbers.” ”.
Q&A: What else sellers should know about home appraisals
No, but it should appraise for the loan amount. According to the loan-to-value ratio, the financed price is the most money a lender will give. For instance, a 20% down payment would be necessary if the LTV was 80%. According to Walters, if a home costs $200,000 but only appraises for $180,000, the buyer would need to pay an additional $20,000 out of pocket to close the “appraisal gap” because the lender will typically only finance the appraised value.
According to contract language that Grossmeier has seen, the buyer agrees to pay $10,000 more than the appraised value. It’s one way to protect a bid.
Similarly, Suits has seen buyers include clauses in their contracts promising to pay an additional $15,000 to $20,000 if the home doesn’t appraise for the asking price.
Can a house sell for more than the appraisal?
Yes, particularly in a seller’s market with low inventory and intense competition, Walters says, provided the buyer is prepared to bring cash to close the appraisal gap. It might make sense for a buyer to pay more than the home appraises if they can afford it, are aware that they’ll have to pay the LTV difference out of pocket, and plan to live in the house long enough to build up enough equity (at least five years).
However, according to Grossmeier, overbidding can occasionally be used as a stalling tactic to frighten away rival bidders and compel the seller to renegotiate a lower price. He claims that in a competitive market, bids that are 64% to even 106% above the asking price are typical.
Can the seller back out if the appraised value is too low?
Most of the time, the answer is “no. “Backing out after the seller accepts a buyer’s offer is a breach of contract.” However, some clauses in the contract, like the new home clause, the appraisal clause, or the home inspection clause, may provide a way out.
Mitchell claims that by the time the appraisal is complete, both parties are typically “too far into the contract” to want to back out.
“If the house doesn’t appraise,” Suits concludes, “nobody wins.”
Do sellers usually lower their asking price if the appraised value is lower?
A seller may lower the price to complete the sale if the appraisal is low. The appraisal is based on market research, Grossmeier elaborates. “The seller can lower the price to match market value. “A broken sale may occur if a seller is unwilling to renegotiate However, if there are other potential buyers in a seller’s market, the seller might not be as motivated to reduce the price.
Mitchell advises the parties to “meet in the middle” on price as the market “normalizes.” “It’s difficult to lower the price in a downturn [market], but when the market is competitive, the sellers have a lot of equity and will still make money [if they do so],” ”.
What should a seller ask a real estate agent to make sure the asking price will match the appraised value?
“Ask the agent where their comps come from,” Walters advises. Make sure they aren’t making exaggerated claims to obtain the listing. A top representative ought to be open and realistic in their expectations.
Bottom line: It all starts with the right listing price strategy
“Most appraisers don’t care what the home’s value is; they just look at the data,” says Grossmeier. However, a seller cares about the value of the house and wants the appraisal to reflect that.
There are numerous outside factors that affect appraisals and are out of the homeowner’s control. However, there are a few things the seller can control, like making sure your house is in excellent condition and that the appraiser has access to everything, like a list of recent improvements.
The seller can also control the price, which is also the most crucial element in obtaining an appraisal that is in line with the asking price. According to Walters, the best way to avoid a low appraisal is to price it properly. ”.
Mitchell believes that by including sellers in the process, realistic prices are produced.
Working with a top real estate agent is one of the best ways to ensure that your home is priced correctly. A top-rated agent will be familiar with your neighborhood and can provide a complete comparative market analysis.
With the help of HomeLight’s Agent Match platform, you can find a top agent who is familiar with your neighborhood. This free tool examines thousands of reviews and more than 27 million transactions to help you find a knowledgeable agent who can sell your house more quickly and profitably. According to HomeLight’s data, the top 5% of real estate brokers in the U S. sell properties for up to 10% more than the typical real estate agent
See our article, A Seller’s Home Appraisal Checklist: Cheat Sheet for Your Home’s Final Exam, for more information on how to get ready for your appraisal.
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Do appraisers know the offer amount?
Consequently, the appraiser will probably be aware of a home’s selling price, though this is not always the case. When we have appraised homes for private sales, there have been instances where both the buyer and the seller declined to provide this information.
Is appraisal based on loan amount or sales price?
The appraisal for purchase mortgages either confirms or establishes the loan-to-value (LTV) ratio. LTV is calculated by taking the lesser of the sales price or appraised value and dividing it by the loan amount.
Does appraiser know refinance amount?
In essence, the process used by appraisers to determine a home’s value for both refinance and purchases is the same. The only distinction is that a purchase appraiser can access the purchase agreement and, consequently, the sales price.
What gets checked during an appraisal?
- The state of the house (are there any damages, cracks, or leaks, for example) ).
- The size of the home and the property lot.
- The quality of landscaping.
- The quality of roofing and foundation.
- The number of bedrooms and bathrooms.
- The quality of lighting and plumbing.
- The number of fireplaces.