There are basically two qualification processes when a buyer decides to purchase a property using a bank loan. The buyer has to qualify for the payments, and the property has to qualify as the collateral for the loan. Once the buyer has given all the necessary information to the loan officer and the underwriters have made the determination that the buyer is a good risk, the loan officer initiates a request for an appraisal of the property.
The loan officer can no longer request that good-old-boy appraiser who has been known to bring each property in at value. Instead, lenders contract with appraisal management companies, and appraisers are chosen from a pool. The lender never knows who it will be and must use that appraiser.
The appraiser’s job is to justify the purchase price to the underwriter of the loan, assuring them that the collateral is sufficient for the risk. However, it is a subjective process since an appraisal is an opinion of value and not a fact. An appraisal of the same property by two different appraisers may yield two completely different values. In the end, the underwriters have the power to say no or to question the validity of the appraiser’s work if it seems inconclusive. They need to be convinced of the value.
The current shift in the market is showing a leveling off of prices and even a decrease in certain markets. We are starting to see some appraisals come in lower than the agreed-upon sale price and anticipate that we will see more as the market shifts. Appraisers sometimes find it difficult to match the expectations of buyers and sellers when it comes to meeting the agreed-upon sales price. The reason is that it is often difficult to find relevant comparable sales when the available data feels like ancient history due to market shifts. This often results in appraisals coming in below the agreed-upon purchase price, leaving buyers and sellers in a quandary.
One solution is for the seller to accept less than originally agreed upon. They may instead choose to find another buyer who can overcome the deficit by making up the difference in cash or by paying cash altogether. Another solution may be for the buyer and seller to split the difference. The bottom line is that if they cannot come to a meeting of the minds, the transaction will fail. In this sort of dilemma, a skilled agent can make all the difference!