The Real McCoy: How can an appraisal torpedo a purchase?

By: Kari McCoy
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Dear Kari, We looked at roughly 45 homes and finally found “the one” and made the offer with our nerves on edge. We were so thrilled when the Realtor said we were the proud new homeowners. Little did we know that was just the beginning of our headaches. We could not believe we were turned down by the appraisal. What happened? Answer: After the buyer and seller come to a “meeting of the minds” on the price of a house, there is one more person (tied to the loan money) who must be convinced that the house is worth the selling price — the mortgage company’s appraiser. Both buyers and sellers primarily look at the property as a home or an investment, but lenders see the same real estate in different terms. To a lender, the property is their security in the event that a borrower fails to repay a mortgage. To limit their risks, lenders want a precise but conservative estimate of the property value before making a loan. To protect their investors, mortgage lenders hire an appraiser to give an independent (or in-house) objective evaluation of what the property’s worth. Please note in today’s market two separate appraisals of the same property are very common. The value of a particular property is more than the bricks and mortar. Occupancy, transition (fluctuation of property values), predominant value, facilities and improvements are all considered in the appraisal of a property. The appraisal forms an important part of the documentation supplied to prospective lenders in the loan application process. The appraiser looks for three or more comparable houses that have sold in the same area within the last six or so months, and compares the selling prices of these homes with the one you are buying. The appraiser looks also at the short sales and foreclosure, be sure they do not just ignore them. They make adjustments to account for the differences in each property, and the price for your house will be the average of the adjusted prices of the other homes. Depending on the current market swings (up or down), the appraisal may leave a small percentage with a cushion in the price, in their favor. In subdivisions or condominium projects where there are many similar properties and plenty of recent sales, the appraiser has enough information to base the price decision. This is a prime example of square footage and up grades making the final price decision. With neighborhoods of older homes that have been renovated or remodeled over many years, it can be like comparing apples and oranges. In some cases, the professional appraiser will use other techniques to determine a realistic market value. The joy and anticipation of owning a new home can sometimes become crushed when the lender turns down the application for mortgage financing. If your loan request has been denied, one of the possible reasons for rejection could be that the appraised value of the property is too low. A primary factor considered by lenders is the ratio of the loan amount to the sale price or the appraised value of the property, whichever is lower. If the appraisal is substantially lower than the purchase price of the property, the loan-to-value ratio (LTV) may be higher than the lender can approve. A low appraisal may make your requested loan too large if you may have applied for a maximum loan amount or of 90 to 97 percent of the purchase price. Your alternatives in this situation will depend upon the reasons for the low appraised value. You may have the chance to obtain another appraisal with the hopes of the out come reaching the sales price. Remember appraisers use data and forms, yet they are human beings too. If the purchase price is higher than the prevailing prices in the area, you can try to re-negotiate the price with the seller. If this is not possible and you really want the house, your only solution may be to accept a lower loan amount and enjoy the home. Kari McCoy has been a Realtor for 25 years and owns the Kari McCoy Group, Residential Real Estate, at Coldwell Banker. She can be reached at 941-9540, or at