When Betsey Rider and her husband decided to sell their four-bedroom house in Annapolis, Md., to tap the rising demand this May, they found buyers before even listing the abode. The Riders and the homebuyers settled on a price of $825,000. But days later the appraiser came back with a value of roughly $720,000—more than $100,000 less than the contract price.
“We could not comprehend why,” says Rider. The couple contested the valuation, but the appraiser wouldn’t budge and the mismatch threatened to unravel the deal. While most home sales still close on time, the Riders’ predicament is not unique.
According to the National Association of Realtors, 9% of contract terminations were caused by appraisal issues in June, up from 3% in April. In both months, problems with the appraisal caused 18% of closing delays, trailing only challenges obtaining financing. Meanwhile, to sweeten their offers in competitive markets, a growing number of buyers are waiving appraisal contingencies, effectively promising to move forward no matter what the appraiser has to say.
Coronavirus is making appraisers’ jobs harder
Many states, including Maryland, encouraged appraisers to avoid going inside homes in order to slow the spread of the coronavirus. This meant the appraiser valuing the Riders’ home did what is known as a drive-by appraisal (some appraisals are being done totally online). Unable to see the residence from inside, the appraiser assumed the lower level—which includes a bedroom and a bathroom—was a basement, which is considered much less valuable than above ground space.
“The house is built into a hillside, which makes it very difficult to appraise because you're basically arguing with an appraiser over what's above-grade and what's not,” says Compass agent Shane Hall, who listed the Riders’ home.
Rapidly shifting dynamics and lingering uncertainty are complicating appraisers’ jobs, as well, especially as historically low inventory and high demand generate bidding wars in many places.
“If a property was marketed for $400,000, but there were 10 buyers competing for the property, and somebody's paying $420,000, what's market value?” asks Jefferson L. Sherman, president of the Appraisal Institute. “That's the tough question that appraisers have. Does that represent market value? Well, it may or may not.”
To determine market value, appraisers look to so-called comps—nearby properties with similar characteristics that have sold in the last six months. Since the beginning of the pandemic, however, appraisers have struggled to find good comps because very few properties sold between March and May.
Using any sales recorded before the pandemic risks skewing the appraisal even more. Mortgage rates are at record lows—down more than half a percentage point from six-months ago. Meanwhile, the pandemic is causing people to rethink their housing needs, with some city-dwellers considering more spacious suburbs for the first time. All of this means demand—and prices—are skyrocketing in many places. “Looking back six months, January was a completely different market than what we're dealing with now,” says Lexi Winter, a Boston-based agent with Keller Williams.
“It's always a battle of recency versus relevancy of the comps,” says Noah Rosenblatt, CEO and co-founder of UrbanDigs, a real estate analytics platform. “Appraisers have limited data to work with today.”
Making it work
Agents around the U.S. agree, low appraisals can be deal killers—but both buyers and sellers have an incentive to salvage the agreement.
If a deal falls through, shoppers are returning to a market with limited inventory, rising prices and escalating bidding wars. They will also part with the money they already paid for a home inspection and appraisal, which together cost more than $1,000 in some cities. “They're out $1,000 and might not have a house,” says Karin Waterschoot-Perez, executive vice president of sales at Plum Tree Realty in Columbus, Ohio. If a seller doesn’t have another interested buyer, the property will sit on the market, which often translates to a lower sale price.
To make the deal happen someone will need to compromise. Sellers may have to accept a lower price, potentially jeopardizing their next deal if they are also buying. Buyers may need to come up with extra cash to bridge the gap between what their lender is willing to provide and what they agreed to pay. This can be challenging for first-time buyers in particular, since they already struggle with down payment savings. If a lender is willing to increase the size of the loan, the buyer may end up putting a lower percent down, which may mean paying a higher interest rate or being forced to buy mortgage insurance.
The best approach is to negotiate a “sweet spot,” agents say. Preparedness, though, can smooth the hurdle in the first place. Sherman advises agents to submit any comps for the appraiser's consideration in advance. “Don’t wait to appeal,” he says. “Be proactive.”
New York City agent Christopher Totaro with Warburg Realty says, “if you're selling a property, make sure that your broker attends the appraisal, make sure that the place looks great, make sure that you have your market research done.” For virtual appraisals, listing agents should provide detailed property descriptions and high-quality images, says Hugo Romero, a luxury property specialist at Coldwell Banker Residential Brokerage in Virginia.
In Riders’ case, the buyers worked with their lender and the deal closed at the agreed sale price, Hall says.
“A low appraisal is something that's very unwelcome with any transaction,” she says. “I don't like it but it does happen. It's going to happen in a shifting market like this, where things are selling a lot quicker for a lot more money than they have previously.”