In today’s real estate market every house for sale must be sold twice.  First, you have to find a buyer ready, willing & able to purchase the home. Second, you must sell the value of that house to a bank so they will lend the money for the purchase of the home. In some cases the second sale may be more difficult than the first.

In most transactions today a mortgage is necessary. The buyer puts a certain amount down and the borrower contributes the remainder of the balance from the lender. The lender then gives a mortgage to the buyer in which they use the house as collateral. But first they must establish the value of the collateral. The lender will send out a representative “the appraiser” to inspect the home and to do research on homes like it that have recently sold in the area to determine the “value”. The lender must feel comfortable that this value is appropriate to provide a loan to the buyer and use the house as collateral.

Now more than every the appraisal process can be more difficult because of the current environment, this is why.

Many more mortgages are becoming delinquent.

The value of the collateral is important, but the other major consideration of the lender when making a loan is the borrowers’ past credit history. If the borrower can prove that they have a history of paying their bills on time, then the lender would not be as concerned about having to take the home back in a possible foreclosure action for non-payment.

The amount of people defaulting on their mortgage is currently 10 times higher than ever before. Even some borrowers are just walking away from their mortgage obligations, some of which have the money to pay. Currently there is a greater chance that the lender will have to foreclose on the loan.  This now makes the appraised value of the home, the collateral behind the loan, even more important. We have seen that this is making lenders more conservative with appraisals because of this.

The mix of the homes used to find the value has changed.

Five years ago there were very few distressed properties. Today short sales and foreclosures make up over 25% of all home sales today. The properties that are being used as comparables by the appraisers to establish the value of a home today reflect this change in the market. Distressed homes sell for less, therefore the result of lowered appraisal values of homes when using distressed properties as comparables.

There is much debate on whether or not an appraiser should even consider distressed properties when establishing value of a home. We understand that the reason for doing the appraisal is to protect the loan the lender is making to the borrower. The home is the collateral. If the borrower does not make payments, the bank will be left with a FORECLOSURE! With this in mind, the bank could make an argument that a distressed property should be considered.

What does this mean for you?

If you are buying…

Remember that you are the only one that knows what the true value of a home is to you and your family. You have probably searched online and seen thousands of homes. You selected the ones you like and went to see them. After seeing everything, you picked out the one that would meet you and your families needs. You have decided on a price you believe to be fair. Don’t allow the appraiser to convince you that your decision was wrong.

You must be willing to revisit the price of the home and see whether the difference can be negotiated somehow.

If you are selling…

Remember that you are selling your home when banks are being conservative on values. If your appraisal does not come in, do not be quick to kill the deal. You may not find another purchaser. There is no way to tell if a new buyer will make the same offer and even if they do, you may still have the same challenge with the appraisal.

Consider all of your options and perhaps you may re-negotiate a deal that you as well as the buyer can live with.