When speaking at Portland area real estate offices, I often hear horror stories about appraisals coming in at just one thousand dollars or so below the contract price of a property that is being sold for several hundred thousand dollars. This difference, often less than one percent, is beyond typical appraiser accuracy but it results in a big hassle for all parties involved who now need to decide if they will bring more cash at closing, cancel the contract, renegotiate the contract, ask for a second appraisal, or dispute the appraisal. Here is my take on why this occasionally happens and the top three things a real estate agent can do to help avoid the situation.
Appraisers are highly trained and regulated to be independent and unbiased third parties. Most appraisers around Portland know a colleague who has been disciplined by the state appraisal board and most appraisers are terrified to do anything that might suggest that they are biased. This feeling of fear can, at times, become misguided and cause some appraisers to reconcile an opinion of value that ignores the contract price and the limits of the appraisal accuracy when working with imperfect or incomplete sales data.
A very small percentage of appraisers falsely believe that the appraiser should estimate a value and pretend that the contract does not exist. I once had a reviewer say to me, “You reconciled giving some weight to the contract price. What approach to value is that? I’ve never heard of a contract approach to value.” This logic does not take into account why an appraiser looks at the contract of sale for the subject and how pending sales and active listings relate to the sales comparison approach to value.
In a real estate appraisal for a typically-financed home sale, appraisers will be given a copy of the sales contract to analyze. The contract price is not proof of market value, but it can be an indicator of value. The main purpose of the appraiser’s analysis is to determine to what extent the contract is an indicator of value. Typically, if the contract price was negotiated after a property was exposed to the market and the buyer and seller are unrelated and disinterested parties, then that contract is probably a strong indicator of value for the subject. The appraiser can give this contract price some weight in reconciliation of a final value as long as it is reasonable to do so within the context of the other value indicators.
Here are the top three things a real estate agent can do to help ensure that the appraisals do not come back slightly low.
Following these tips should help eliminate a few frustrating closings, but it is still up to the judgement of the appraiser. Sometimes buyers pay a little too much for a property and it is perfectly acceptable for an appraiser to come in slightly below the contract price after analyzing all of the evidence. The important thing to know is that most appraisers do not want to cause trouble and will work very hard to make sure they are right before sending off an appraisal that is sure to become a lightning rod because it is slightly below the contract price.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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