3 Reasons Appraisers Might Value A Property Lower Than What You Paid

By on November 25, 2017

When you are dealing with real estate transactions on a regular basis, either as an investor or typical buyer, one of the biggest shocks you can get is to find a house being valued much lower than what you paid for by an appraiser.

And you thought you were the one walking away with the longer end of the stick!

This can cause serious financing problems.

The appraiser usually gets involved in the transaction process when the lender needs to get an appraised value of the property so that they can work out a loan-to-value ratio.

So if you bought a house at $300,000 expecting to obtain an 80% loan of $240,000, you could only end up with a $200,000 mortgage when the appraiser values the house at just $250,000.

This shortage of $40,000 could cause you to fail closing.

$40,000 is no small sum of money.

If you are unable to obtain a new appraisal at your purchase price, you might have to abandon the deal altogether due to the simple fact that you simply don’t have enough cash on hand.

Here are 3 of the most likely reasons for appraisers to value a property less than what you’ve paid for.

1) You truly overpaid for the property

While it can be humbling to admit that you’ve made a mistake with the price you’ve agreed to pay, it can nevertheless be a sad fact.

Human beings make mistakes. And you are not immune to it.

Maybe you overlooked key elements of the property that caused the subdued value. Maybe you were misled by a “trusted” source. Or maybe you got scammed one way or another.

The thing is that lenders are in the business of lending money. And most of the time, they would want appraisals to come back with a value that matches the purchase price so that they can start printing the facility letter and prepare for disbursement.

Undervaluing a property is not unheard of. Just uncommon.

If anything, it serves as a good wake up call for you to re-evaluate the deal.

If possible, find out why the appraiser determined the value in the first place. Sometimes, it can be problems that can be fixed by contractors.

On the other hand, it can also be due to grave problems that you were not aware of.

Use this opportunity to investigate the deal thoroughly. You can even try to negotiate for a better price by using the appraisal as a bargaining chip.

If all else fails, remember that you can still walk away from the deal.

You might lose a little money from the deposit. But it’s sure better than ending up with lemon that puts you deeply into the red the moment you officially become the new owner.

2) Lender is trying to back out

Lenders can have various reasons to find a property undesirable.

While it was previously stated that lenders would more likely prefer to approve loans than reject them, there can be times when they want to finance a property but later deciding against it when discovering more details about it.

For example, do you know that property with religious connotations can be something that banks avoid?

This is because should the borrower defaults on the mortgage, the bank do not want to be seen as the lender who foreclosed on a church or temple for example.

Other reasons could be that the property resides in an area known for vice activities, owned by politicians, or have questionable ownership histories.

Because lenders might not be comfortable to reveal the real reasons why they decided against financing a property, they could come up with a “legitimate” reason for not doing the deal due to “low appraisal”.

There is actually a term for such practices. It’s called sandbagging.

When you run into such situations, the silver lining is that these lending criteria are not universal.

There is every likelihood that the competing lender next door would willingly offer you a loan big enough to complete the transaction.

So just go shopping for one.

3) Appraiser has little local expertise

Although we often think of appraisers to be well-informed professionals who can value property accurately, it is not unimaginable for them to make mistakes.

This is happen when they are not familiar with local property values.

If all the local real estate agents who you have confided in insists that the price you’ve agreed to pay is fair market price, there is a good chance that the appraiser is not in-tune with what’s going on on the ground.

Resulting in a appraisal that does not reflect real market value.

If you are convinced that an appraiser has grossly undervalued a house, do inform the lender and challenge their figures.

If justified, they can order a new appraisal to be conducted by a different appraiser without any additional fees charged to you.

Finally, remember that walking away from a deal is always an option to consider as long as you have yet to close.

If a property do turn out to be worth much less than the price, you have to put serious consideration into whether to complete the deal or not.



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