Even when a seller and buyer agree on a price for a home, the deal can collapse if the property appraises for less than that price.
For example, let's say a seller lists his house for $325,000, the buyer offers $275,000, but they settle on $300,000. A week before closing, the appraisal comes in at $265,000. That's the maximum price for which the lender is willing to offer a mortgage.
Who's going to make up the $35,000 difference?
In this case, the seller has already come down on the price and doesn't want to lower it again. And the buyer may not have enough cash to cover the shortfall, or does not want to pay more for the house than its appraised value.
As a result, the deal falls through.
Short appraisals are common in declining housing markets because the lack of recent comparable home sales in the area, or "comps," make it hard for appraisers to determine the current market value of a property.
When home sales slow down, good comps "age" quickly. Add foreclosures and short sales to the mix and appraisals can run all over the map.
The Home Valuation Code of Conduct, or HVCC, which went into effect in May 2009, compounded the problem. The HVCC prohibits Fannie Mae and Freddie Mac lenders from having direct contact with appraisers.
As a result, most lenders work through appraisal management companies, or AMCs, whose pool of residential appraisers includes those with limited training or little familiarity with the geographic area being appraised.
You can protect yourself from low appraisals. Here are some suggestions for buyers and sellers.
If you're a buyer:
If you're a seller: