Almost every real estate sale involves an appraisal contingency designed to protect the home buyer and mortgage lender from paying too much for the property. Appraisals are generated by licensed appraisers who are contracted to generate a third party’s opinion, using established criteria, to determine and document current market value.

Although I am a real estate agent in Northern Virginia and reference the local Realtor Association standard sales contract, I believe that the basic premise here is the same across the U.S., but you should check with your local agent for specifics. Appraisal contingencies are going to be a part of the contract so it will be easy to find.

An appraisal should get done in the 21 day period

• Contingency period: This is intended to give some teeth to getting the appraisal done quickly (about 21 days), but the NVAR version allows for the contingency to extend automatically. If a home seller really wants to put their foot down to enforce a deadline then they can submit a written Notice to the buyer. The buyer will have three days to respond to the Notice.

Once the appraisal is completed, the results are given to the buyer and the lender. Since the buyer is paying for it, the entire written appraisal will be provided either electronically or in paper form at some point. A few years ago, lenders required the buyer to submit a written request and then it would be mailed after settlement. These days buyers can get it quickly as a PDF through e-mail.

• The value is equal to or greater than the Sales Price: This is the ideal scenario that everyone got it right from the start. The buyer should submit the proper form removing the contingency to help the seller sleep at night.
• The value is okay but the property does not satisfy the lender’s conditions as satisfactory collateral: If the appraisal includes extreme conditions then the buyer cannot obtain any financing. Along with a notice voiding the contract, the buyer will need to provide a copy of these conditions and written rejection from the lender for financing to the seller.
• The value is not equal to the sales price: When this happens the buyer needs to provide a copy of the the appraised amount to the seller. At that point, if the seller elects to reduce the price to the appraised amount then everyone is still bound by the contract to go to settlement. If the seller says no, then the parties can come to a new agreement or declare the contract void.
• The appraised value is below the sales price: Yes, this is the same scenario as above, but a buyer who feels the property is worth it can pay the difference rather than walk away. An appraisal is an “opinion of value” and won’t take into account benefits that a buyer may put a premium on such as a top ranked school pyramid, walking access to the Metro, or a short work commute.

You may value a top school more than your appraiser

Appraisals are typically the most stressful part of the real estate transaction for the buyer and the seller.

Buyers don’t want to pay too much.

Sellers don’t want the sale to fall apart.

Helping determine a home’s market value is something professional real estate agents spend a lot of time on. Upgrades that don’t appear in tax records that online valuation apps like Zillow.com’s Zestimates use need to be factored in because home buyers value upgrades to kitchens, bathroom, roof or siding.

Your agent should give you their professional opinion after they have seen the home and compared it to local homes in the market to help target a value that meets the  opinion of an appraiser. Yes, there is homework involved!

Related articles

• How to prevent low property appraisals – fingers crossed? (agentgenius.com)
• Fannie Mae Tightens Up on Appraisals (annarborundressed.com)

Government insured loans such as FHA or Veterans Administration (VA) have not impacted because they do not sell their loans through the Fannie/Freddie mortgage market.

So what’s the big deal? Haven’t all real estate loans required appraisals?

Maybe a little history lesson will help.

In 2007, New York Attorney General Andrew Cuomo sued an appraisal company accusing it of colluding with Washington Mutual Home Loans of using only appraisers who inflated property values, which “helped set the mortgage crisis in motion.” This case was settled out of court.

As part of the settlement, Fannie Mae and Freddie Mac agreed to adopt a set of rules spelling out how appraisals will be handled for any mortgage that they would be a part of, and that is a very high percentage of the mortgage loans across the United States. These became the HVCC guidelines,  just four pages long. The main purpose is to keep lenders and appraisers honest by limiting the chance that the appraisal process will be influenced by someone who is part of the loan process.

“The HVCC is designed to promote professional appraisals free from inappropriate pressure from lenders, borrowers, or mortgage brokers.” – Federal Housing Finance Agency

Sounds reasonable to me.

In reality, it has created a new layer of bureaucracy. Mortgage lenders are the ones who order appraisals, and with this “wall” between them, someone is needed to contact the appraisers.

American Motor Corp.

To fill that void, we welcome Appraisal Management Companies (AMCs) to the mix. The AMCs assign appraisers from a list as the orders come in from the lenders.

Here are a few of the rubs:

• The cost of most appraisals have increased
• Appraisers are now asked to do more work if they want to stay on the list
• The actual appraisers are being paid less, there is another hand in the till
• AMCs are assigning appraisers based on geographic location, such as Virginia (a rather large state)
• Many appraisals are now missing items that impact value, resulting in low appraisals
• Many transactions are being renegotiated or canceled due to low appraisals

The Regional Sales Contract for residential real estate used in Northern Virginia has a contingency that the home must appraise at or above the contract sales price. Only in fire-sale prices do we see appraisal above the contract price since appraisers follow the market and not lead the market. As a result, it it essential that appraisers have all the information when calculating value because any missing data may result in an appraisal far below actual value.

So home sellers are not the only ones impacted when appraisals are off the mark… ask a buyer who negotiated a good deal only to have it fall apart because the appraisal came in too low. Yes, the seller can say, “sorry, the deal is off with you. Bye, bye now.”

And unknown to the buyer who thought he had a “done-deal” and now needs to start looking again,  there may be another home buyer with more cash on hand to snap up that great deal. On the other hand, the seller may be left waiting another month for another offer that will probably be lower than the last one.

Determining a net sales price for a home is impossible if you are looking at recent sales data published in the local newspaper. Newspapers publish only the sales price recorded at the county courthouse, and these numbers don’t reflect if there were seller credits to the buyer. And most real estate web sites take the same feed which leaves readers with less than complete information.

The easiest example would be if two very similar town homes sold in a subdivision, let’s call it Vienna Oaks. One sold for $530,000 and the other sold for $525,000 according to the Gazette, but when you are able to review the detailed sales data it shows that one of those sellers credited the buyer $12,000 toward their closing costs. And until you know where the numbers match up, you are in limbo.

There are at least twelve key factors that I review when determining value of a home in a neighborhood primarily because today’s appraisers are aggressively scrutinizing each home and each recent comparable that they are using in their written analysis. No longer are they going back six months like the have done for years, but they are using data no older than 90 days.

Understanding the current playing field will help get your home successfully sold.