Real estate appraisals can be a nail-biter in a fast-moving real estate market like this one. Find out everything you need to know here. Knowing what an appraisal in real estate is may help you get through that part of your property sale a little more easily.
WHEN YOU DON’T NEED AN APPRAISAL IN REAL ESTATE
Unless a homebuyer is paying cash, an appraisal is going to be a part of your real estate transaction. In fact, the appraisal is one of the most important pieces of the process.
It’s very rare for a real estate appraisal to be higher than the agreed-upon purchase price but it does happen.
The problem is when the appraisal is lower than the purchase price. If that happens, there are two options: The seller can agree to lower the purchase price or the buyer is going to have to make a higher deposit than expected.
THE Real Estate APPRAISAL PROCESS OVER TIME
Over the past couple of decades, we’ve seen a lot of changes in the appraisal industry. The largest financial reform bill in U.S. history, covering consumer credit products and services, is the Dodd-Frank Wall Street Reform and Consumer Protection Act. To keep the Mortgage Meltdown and the Great Depression from ever happening again Dodd-Frank was enacted.
HOME VALUATION CODE OF CONDUCT (HVCC)
The appraisal process was altered 180 degrees in 2009 with the Home Valuation Code of Conduct (HVCC). It was a disaster. It required mortgage lenders to use a third party to contract with an appraiser. Lenders hired Appraisal Management Companies (AMCs) to manage a tedious and cumbersome process. That’s where the problem – and I mean huge problems – came up.
THE Real estate APPRAISAL MANAGEMENT COMPANIES WERE CLUELESS
The AMCs had no idea what they were doing. It was a new industry with new people working with new guidelines. Because they hired out-of-area appraisers at cut rates, we got back sloppy, incomplete, appraisals at the wrong price. As realtors, we were terrified of who the appraiser was going to be. Every day we talked about who the appraiser was going to be and what area they were coming from. If we got the wrong one and they did a poor job of determining value, the whole transaction could fall apart.
MORE LAWS: APPRAISER INDEPENDENCE REQUIREMENTS
Prior to all the upheaval, realtors and appraisers would communicate about the property, the number of offers, relevant comparable properties, and upgrades.
In 2010, the Appraiser Independence Requirements (AIRs) came into effect. They had the combination of AMCs, and later the AIRs, to keep appraisers from being influenced or pressured by banks or realtors.
Order the Real Estate Appraisal First
Just after everyone signs, the appraisal will be ordered. Right now we have a shortage of appraisers. Because of that, timelines are negatively affected. Sometimes a few days or even a few weeks.
What’s the cause of the shortage?
The requirements to become an appraiser have increased while the pay has decreased. Nobody is excited about being a real estate appraiser anymore. Experienced, well-qualified people are walking away.
What are appraisers in real estate looking for?
Their focus is to determine if the offer received makes sense. Does the price match the value of the property based on other nearby sales? They’re looking at the things that make the house valuable: its condition (upgrades or remodeling), location (the neighborhood and nearby amenities), and square footage of the house, and the lot.
The buyer pays for the real estate appraisal as part of their closing costs. Although the buyer is paying for it, the bank is actually the client. They usually have the most money and risk in the property.
They’re going to use it as part of their determination of whether or not to approve the home loan being taken out on the property.
HOW TO PREPARE YOUR HOUSE FOR THE APPRAISAL
Getting the house ready for the appraiser is just like putting your house on the market that very first day. You won’t have to go back to square one if you prepped your house properly. But here are some important things you could do:
- Curb appeal is just as important to buyers as it is to the appraiser. Show them why your house sold for that price and what interested the buyer enough to actually write the offer.
- Consider doing those small repairs that were listed in the property inspection. Items like replacing the caulking around the sink or tub are quick and can make a difference. Get out your home inspection and see what you can do to encourage the appraiser to give your house a gold star.
- Prepare a list of improvements, especially if they’re recent and extensive. Most appraisers can determine what was done this year as opposed to 20 years ago nevertheless, it’s helpful to give them something they can reference when they get back to the office at the end of a long day.
- Pets and smells: I was at a seller’s house waiting for the appraiser. At the same time, their very sweet dog was running all over the house acting as cute as can be until he bit the appraiser. Put the pup somewhere else and air out the house by opening the windows – not by lighting candles or burning incense.
WHAT SHOULD YOUR REALTOR DO?
Well, if your realtor is on top of it, he or she will attend the appraisal instead of leaving it to the buyer’s agent. The listing agent can inform the appraiser if there were multiple offers, how many, and for how much. Your agent can also provide the list of improvements that you’ve prepared and some information on comparable sales in the neighborhood while equally importantly carefully following the “stay-away guidelines.”
Now, the real estate appraiser can do their own research to find comparable sales but it will be helpful if the realtor can do some of the work. As a matter of fact, agents can sometimes find out the sales price on homes that are under contract but not closed yet.
WHAT IS THE PURPOSE OF THE real estate APPRAISAL?
Although the appraisal is required by the mortgage lender, it’s paid for by the buyer. The bank or mortgage company wants to know if they’re making a good investment by loaning the buyer the money to purchase your house. The more well-qualified the home buyer is, the less value the bank will put on the appraisal. That’s why it’s incredibly important for your realtor to take a close look at any buyer who submits an offer.
They need to look at how much money the buyer is putting down as a deposit and downpayment. A smaller downpayment should be considered carefully. Where is the money coming from? Is it liquid? Do they have to sell stocks or bitcoin? That can cause a delay in the transaction. And do they have enough cash to pay their own costs associated with the sale (closing costs)?
In an escalating market, houses are selling for more than the asking price, therefore there is a risk that the house will not appraise for that record-setting purchase price. One of the cautions to take when accepting an over-the-asking-price offer is: Do the neighborhood sales support that price?
What happens when the house doesn’t appraise
If not, the buyer may have to pay the difference between the sale price and the appraisal price. At the time the offer is reviewed, your agent needs to make sure of three things: The buyer is aware that they may have to pay the difference; whether or not they can afford to pay that difference and they’re actually willing to do it.
In a more “normal” market, home buyers and their agents are going to look at past sale comparables to determine the appropriate price to offer. Those sales are used as a benchmark to know if the buyer is making an offer that’s too low and won’t be accepted or if overpaying and will have buyer’s remorse later – or it won’t appraise.
Last month’s comps are irrelevant
In a market that’s moving so fast that sales from 30 days ago are old and irrelevant, it’s a source of a lot of uncertainty and tension. Oftentimes, homebuyers – especially first-time homebuyers – are learning the process as they look at open houses, review sale prices, and have conversations with their agents. In a market that is rising as rapidly as it is now, they can’t take their time learning the process. They can’t take much if any, time to consider whether or not they want to make an offer. That house will be gone if they take too much time to think about it. When that new sale becomes the new benchmark, they could be priced out of the market totally.
How to Maximize the Sale Price
Sellers and their agents are navigating a large amount of interest by setting an offer date. The condition of the market will determine how long to wait; maybe a week or ten days. Each agent is tasked with advising the home seller of the appropriate timeline to generate the highest possible sale price. That consideration is done accurately when an agent really knows the market and understands today’s home buyers.
By setting a date to review offers you’re making the property seem even more in demand – if that’s even possible or necessary. It alerts the buyers and their agents that this property is so in demand – it’s getting so many showings – we have to hold everybody back by setting a date for offers.
Pre-emptive Offers
This is one of the most frustrating parts of this type of market. A listing agent will set a date to receive offers. Then a buyer will throw in an incredible offer prior to the offer date. A pre-emptive offer has to be enticing and exciting enough to get the seller to be willing to take it before their predetermined offer date. And if it is, all those buyers that were waiting for the offer date, waiting to get an appointment to see the house, waiting for a loan approval letter from their lender, are crushed when the house sells. One of my buyer clients described it as “insulting.”
Realtors love this kind of market. Not!
It’s generally the public’s opinion that realtors love this kind of market because the house sells for a higher price and then we, logically, get paid more. This is so far from reality. When houses are selling through pre-emptive offers for skyrocketing prices, our buyer clients are getting completely eliminated from the market because they can’t compete at those higher prices. They’re beat up from repeatedly writing offers that don’t get accepted. It’s a frustrating mess. It’s tiring and frustrating. If they’re not thrown out of the market with rising prices they may be when interest rates go up.
The other day I went to show a house that didn’t have an offer date yet – it just came on the market. My clients and I got out there right away to see the house. I called the agent to ask a couple of questions which he answered. Later that day, I found out that the house had already been sold. What?! The agent never told me that the house had sold – not before I got there or while I was there at the house showing it to my client and texting him questions about the house. The chaos and frenzy this market generates is infuriating.
Why prices are skyrocketing
It’s common – even normal – for homebuyers to write offers on several houses before one is accepted. That’s if they’re fortunate. They may get priced out by the escalating sale prices or rising home mortgage rates before they give up.
Rejection is difficult for anyone. Homebuyers may be rejected repeatedly before they actually get their offer accepted. Sometimes they get so frustrated that they submit an extraordinarily high-price offer. If that doesn’t work buyer fatigue can set in. They’re sick of getting beat up, beat out, and they just give up and say forget it. All that time, money, and effort for them and their realtor is lost.
So although the real estate appraisal is at the buyer’s cost and being done to get the loan approved, you need to be cognizant of the importance of it and how it will affect the sale of your home.