low appraisal loan refinancing mortgage

How To Deal With a Low Appraisal Result which Complicates Buying or Refinancing in Today’s Market

Home appraisals are based on recent sales prices of comparable properties.  In rising price markets, those sales prices might not be high enough to support new home sale prices.

Here are some ways sellers can improve their home appraisal results:

  • Make sure the appraiser knows the neighborhood.  Sellers can request that the lender send a local appraiser; if that still doesn’t happen, owners should supply as much information as possible about the quality of the neighborhood.
  • Provide your own comparables. Sellers should provide the appraiser with at least three solid and well-priced comparable properties.  This will save the appraiser some work, and ensure that he or she is getting price information from homes that really are similar to the one being appraised.
  • Document home improvement projects. Sellers should provide before and after photos, along with a well-defined spreadsheet of what was spent on each renovation, which should persuade an appraiser to turn in a number that far exceeds what he or she first called out. It’s important to highlight all-important structural improvements to electrical systems, heating and cooling systems – which are harder to see, but can dramatically boost an appraisal.  Showing receipts also may be helpful.

low appraisal loan refinancing mortgageTo determine the value of a property, appraisers are supposed to review purchase prices of similar, nearby homes that sold in the past six months. But when a property is much pricier than others in the neighborhood, it can be hard to find similar examples close by. As a result, their asking prices are often out of whack with values that are later determined by appraisals.

“The higher you go up the ladder in value generally the less data you have,” says Danny Wiley, chief appraiser for LSI, an appraisal-management company based in Irvine, Calif.

To find relevant numbers, appraisers in many cases have been digging up older sales as far back as five years ago, consulting current listing prices that might not reflect what buyers are actually paying for a property and even looking at sales prices in other markets.

Further complicating matters, some luxury real-estate values are partly determined by the services and amenities in that neighborhood. City cutbacks in police patrols, fire services, park maintenance and school-district funding can also contribute to lower property values.

For sellers and buyers, the process often results in an appraisal amount that’s below the agreed-upon purchase price of a home. Lenders, in turn, will typically lower the mortgage amount that they’ll give a buyer, leaving the buyer to make up the difference, often with a larger down payment. Another scenario: The buyer refuses to pay more than the appraised amount and renegotiates the purchase price with the seller. And if that fails, buyers can decide to walk away from the deal.

On average, one-third of real-estate agents said the appraisal process resulted in buyers and sellers delaying or canceling contracts or renegotiating to a lower sales price last year, according to a National Association of Realtors’ monthly survey of roughly 3,000 agents. That’s up from less than 10% in 2008.

Experts say this figure could grow going forward as the luxury real-estate market continues to surge. Appraisals can undervalue properties when markets are rising because they look backward at lower valuations. Some appraisers may not adjust for the discrepancy, he says.

It’s not just home purchases that are at risk. Homeowners trying to refinance can also be burned. With private jumbo mortgages, if the appraisal indicates that the borrower’s loan amount is more than 80% of the value of the home, the borrower will likely have to put more money down if he wants to proceed. In other cases, a lower appraisal could keep borrowers from getting the lowest rate possible.

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