So you found the perfect buyer for your home. What could possibly go wrong?
Before the Great Recession, most homes that went “under contract” made it all of the way to the closing table, despite the challenges of loans, inspections, and uneasy buyers. Now, unfortunately, there’s a new challenge in the process.
The appraisal process, where historically almost all houses “appraised” at the sales price or higher, is now one of the biggest obstacles to a successful home sale. In addition, ultra-conservative appraisers are contributing heavily to the downward pressure on home prices as we try to emerge from 4 years of bad housing news.
Let’s look at a simple example of a home appraisal in the early 2000’s and today. You’ve made some lovely improvements to your home in Pleasant Acres, where the last few homes have sold for exactly $200,000. A buyer loves your perfectly maintained lawn, the new stainless steel appliances and the screened porch you’ve added. They agree to buy your home for $210,000 – a recent record for Pleasant Acres.
This used to be the way neighborhoods appreciated – the appraiser would see the value of the improvements, acknowledge that your home was of greater value than the others which had sold, and would usually give you an appraisal that matched the $210,000 agreed-upon sales price. The loan went through, the sales process moved forward towards closing, the buyer and seller were happy, and the neighbors were aglow with the new price level for the neighborhood.
Today’s appraisal process, with huge pressure from lenders who are troubled by past fraud & abuse, looks quite different. The appraiser is increasingly likely to ignore your improvements and see the $200,000 recent sales as a cap on the appraised value of your home. In addition, since home pricing has been falling in the area, the appraiser may decide to make a “market adjustment” to allow for downward pressure and give your perfect home with the $210,000 contract price an appraisal of $195,000. This will scare the buyer and will also prevent their loan from being approved. Your two most likely outcomes are a failed sale or you, as the seller, being forced to lower your price to the appraised amount.
While this new challenge in the home selling process is disheartening for the home seller, it also has a great impact on a housing market that is trying to recover. If homes can’t sell for increased prices, the appraisal becomes another key driver of declining prices and actually helps to keep the overall market from recovering. The conservative new practices end up hurting buyers, sellers, lenders and the overall economy.
If you’re selling your home, it makes sense to approach the appraisal as an important step in the process. With some research or the help of your realtor, you can supply the appraiser with some comparable home sales that support your sales price. If your home has lots of special upgrades, prepare a list of the improvements, as well as how much you spent on each project. These steps will improve the odds of getting a favorable appraisal!
* All information believed accurate but is not warranted.