Why does the appraisal matter?
If you are buying or selling a house and there is a mortgage contingency attached to the offer, the lender will require an appraisal. If the appraised value comes in lower than the agreed-to purchase price, the deal may fall apart. For more on what happens when an appraisal comes in below the purchase price, please click here.
Why are appraisals inaccurate?
In my experience, there are two main factors that may cause an inaccurate appraisal. To clarify what I mean when I use the term “inaccurate”, I mean when the appraiser’s value doesn’t match the market value. The market value is what consumers (home buyers) are willing to pay for the house.
Unavailable information
The first factor is when vital information is missing or incorrect in the comps the appraiser is using. For example, if a comparable property was sold under duress (like a divorce or estate sale where the heirs needed to liquidate immediately), the sale price of that comp may be artificially low. Similarly, if the property went under contract and then the deal fell through and it went back on the market before finally selling again, it’s likely the final price was lower than what it originally would have been.
If the neighbor to a given comp had four vicious dogs that barked all day and lived out in the yard, the property would be less valuable to a buyer. There’s no way the appraiser would be able to know about those dogs. Sometimes, if the lot is very steep, the photographer consciously composes images or leaves out views entirely, so the appraiser may not realize that the rear yard is basically a cliff. A property with a steep, unusable back yard might be worth much less than one that you are considering, even if the lot size is the same. Maybe a property that seems comparable has a parking situation that is significantly inferior. Wet basements, knob and tube wiring, poor layout–these are just a few examples of the kinds of things that reduce the value of a property to a buyer but which may not be clear to an appraiser who cannot see the properties in person, but, rather, must rely on viewing an online listing.
Appraisers not thinking like buyers
Above were examples of things an appraiser has no way of knowing. The second factor in inaccurate appraisals results from appraisers not evaluating properties through the same lense as the buying public. Many appraisers seem not to understand some characteristics of a house or property that can significantly affect how much buyers will pay for a property. For example, appraisers often focus on total above grade square footage without considering how many bedrooms might be crammed in to that space. For most buyers in my area, four bedrooms vs. five in 2500 sq. ft. is preferred. Similarly, appraisers often miss or don’t account for things bedrooms on a floor (usually the third) with no bathrooms on that floor. From a buyer’s perspective, bedrooms on a floor without a bathroom are not usable as bedrooms. Basements that can easily be finished vs. those with low ceilings or layouts that are not conducive to finishing can also affect a buyer’s estimate of value.
There are limitless examples of where/why an appraisal may not match what the market is willing to pay for a property. When these mismatches occur, the appraised value of a property may come in low. A low appraisal may cause the transaction to fall through. To be clear, a low appraisal doesn’t necessarily kill a deal, and there are several possible solutions, including writing the offer with appraisal gap coverage. The buyer and seller can negotiate to see if they can reach a mutually acceptable agreement. While neither a buyer nor seller can control what the appraiser ultimately values the property at, it may be helpful to be aware of what might happen. Forewarned is forearmed!
If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973
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