When a real estate market is hot – and Denver’s is steaming – it’s not unusual for home appraisals to come in lower than expected. That’s often because appraisals can’t keep up with how quickly homes are selling.
Even though it’s a seller’s market, desirable homes going through bidding wars drive a purchase price up. That makes finding comparable properties difficult for appraisers. A lower than anticipated appraisal isn’t the final appraisal, and you have various options available when the appraisal amount is initially disappointing.
Home appraisals are based on sales comparables, or “comps.” They aren’t the same as comparable market analysis (CMA) figures, which is how the real estate agent may have come up with an asking price. An appraisal is conducted by an expert licensed in the field, while a CMA is a rough estimate. The appraiser is paid a flat rate for services, while a real estate agent receives a percentage of the purchase price.
Of course, it makes no sense for an agent to seriously overestimate the value of a property when listing it, as that’s one way low appraisals and related problems occur. Under Colorado real estate law, contracts include an appraisal contingency, so that if the property appraises lower than the agreed-upon price, the buyer can get out of the contract.
If the original appraisal seems off base, it is possible to appeal it or get a second appraisal. The buyer may balk at paying for a second appraisal, so the seller should consider footing the bill.
If the home is in a development where dwellings are fairly similar, it’s more likely the valuation will stand. That’s because the “comps” are easy to determine. A custom or historic home may have few, if any, recent comps in the area. The appraisal document will list the comps used, and it’s possible the local government does not make information regarding new sales immediately. Work with your real estate agent and loan officer to find the latest comps when challenging an appraisal.
The appraisal is a detailed document, so study it carefully for any incorrect or missing information. The appraiser isn’t apt to leave out a bedroom or bathroom, but they may not note any extensive remodeling of the bathroom, kitchen or other parts of the house that may increase value. Appraisers may not include the correct square footage, the acreage of the property, or leave out a fireplace or other higher-end amenity. A provable error gives you the right to appeal the appraisal.
If the appraisal price isn’t too far below the asking price, the simplest option is for the seller to reduce the price to the appraised value. For example, if the price agreed to by the buyer is $500k, but the appraisal came in at $490k, a $10k reduction speeds the process along.
Let’s say that the asking price is $500K and appraisal price comes in much lower, say $450k. Normally, the lender will not loan funds for a house with an asking price above appraisal. So, the seller may be forced to negotiate with the buyer and lower the selling price. Or the buyer to make up the difference with additional cash over and above the loan amount at closing. Remember, the appraisal price affects what any mortgage lender will loan on the property. Sometimes the buyer and seller are forced to compromise, with the seller accepting a lower price, or in the alternative, the buyer providing the difference between the appraisal and the asking price. In situations like this it is important for the seller to understand that the same issue will come up for any subsequent buyer in the near future unless they’re lucky enough to find someone who pays cash for their house---and in an amount above the appraisal.
If a seller remains unrealistic about the home’s valuation and refuses to budge, the buyer really has no choice but to walk away. Even if the buyer does have the cash to make up a significant difference between the appraisal and asking price, why would they spend that money? Unless the property has some unique feature that is so desirable to the buyer. prices will continue to increase, causing them to could lose money when they sell. Even if the buyer intends to live in the home “forever,” life changes happen and they could lose money when they sell. Don't be afraid to walk away from a good property if the seller is overly unreasonable about the valuation.
Buying or selling a home is stressful, even if the entire process goes relatively smoothly. Since many real estate sales aren’t exactly smooth sailing, it’s crucial to obtain legal advice from an attorney experienced in Colorado real estate law.
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Topics: Real Estate in Colorado
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