Did they dodge the bullet?
A reader, K, wrote this note to me on Wednesday about her friend’s failed appraisal.
Hi Rona,I just heard a tale of woe from a friend trying to buy a house in Boston and I wanted to pass it on to you in case you can use it. My friend and her husband had a signed P&S to buy a 2-family house. The appraisal came in $50,000 below the agreed upon sale price, thereby jeopardizing the mortgage financing. The sellers refused to renegotiate the price, insisting instead that the buyers get a second appraisal. The second appraisal came in even lower! The sellers still refused to lower the price and the buyers walked.
I wonder if this is happening more often. And I can't understand what this seller is thinking. Do they think they're going to find a cash buyer? Do they think the appraised value will go up? Are they nuts?
The silver lining of this was that I was able to tell my friend, who is unfamiliar with the neighborhood, that I thought she was lucky to be out of the deal. I know that the house is in a pretty rough area and she would've (in my opinion) paid too much if the deal had held up.
To add to K’s story, I want to remind readers that an appraisal for a two-family house costs roughly $500. So this was an expensive walk-away for K’s friends. They paid for home inspection, an attorney for the P & S, the two appraisals and assorted other lending fees.
The appraisal is not there to protect the buyer from overpaying; it is there to protect the lender from lending more than the collateral property is worth.
Houses can fail to meet appraised value for a number of reasons.
1. Appraiser error. The common complaint recently is that appraisers are not as geographically centered as they were before HVCC. Especially in cities, value can change dramatically from area to area. An appraiser who doesn’t know the difference can underestimate the value of a house by comparing it, due to ignorance, to one in a cheaper area.
2. In a market that is going up, the buying public is willing to pay more than the previous season's prices. Complaints about appraisal happen in every rising housing market because “value” goes up three houses at a time. The first buyer to pay an inflated price is overpaying. So is the second and third. Once there are three of them, that becomes the new “normal” threshold. That’s how markets go up. Does that explain what is happening now?
3. The buyer just paid too much, with or without competition, with or without a bull market. Buyer error.
It’s easy to blame the buyers. It’s easy to blame the appraisers. My question is what is happening now? Is it the buyers, the appraisers or a little of both. I’m not having appraisal problems, but lots of people are.
