Low Appraisal Season with Kyle Bergquist

Tis the Season!  With the real estate market roaring back to life, now, more than any other time of the year, is when we risk receiving the dreaded “low appraisal”.

In the last 15 days, pending transactions for single family residences in Seattle have soared 64.23%, and days on market have fallen by almost a full month (from 62.56 days to 37.35).  In fact, days on market for single family residences in Everett, Marysville, and Lake Stevens is down to only a week and a half right now!  With the turning of the calendar comes a renewed sense of excitement and optimism for the Puget Sound Housing market, and we’re seeing it in the data.  As the market rapidly swings from tepid to extreme hot seller’s market, we’re likely going to see housing prices rise.  This rapid appreciation rate is what sets the stage for “Low Appraisal Season”.

Firstly, we need to understand what exactly an appraisal is.  An appraisal is quite literally an Opinion of Value from an uninterested and unbiased third party (an Appraiser).  The appraiser develops their opinion of a home’s value based on what has sold in the recent past nearby – Key word:  What has SOLD.  Not, what’s gone pending in the neighborhood, but what has closed and recorded with the county.  Herein lies the problem:  When homes are rapidly appreciating, closed transactions generally closed at a lower purchase price than what homes are selling at for in the current market.  And the market can move quick.  I mean, check out the datapoints above!…all that happened in the last 2 weeks!!!  Or, check out the chart below for the Spring 2022 housing market – Prices in King County rose from $775,000 in January to $995,000 in April.  That’s $220,000 in 4 months!  Or said another way, about $12,200 PER WEEK!!!

As you can imagine, with prices appreciating this quickly, it can be hard for an appraiser to justify a price tens of thousands of Dollars higher than something similar that sold just a month earlier, which is why we’re entering “Low Appraisal Season”.

What can we do about this?  For starters, a really good real estate agent will provide a comparative market analysis (a CMA).  CMAs are similar to appraisals in that they identify a home’s value, but that doesn’t mean they’re a valid appraisal that can be used by the bank (mostly because agents are “interested parties” in a transaction, whereas appraisers aren’t).  Anyway, a CMA will provide a really good idea of a home’s value, which is then used to help craft an offer.  Honestly, there are lots of people who fall in love with homes that escalate above the CMA value and know upfront that a low appraisal may be coming.  But regardless, a solid CMA is a great start to avoiding a low appraisal.  The next thing we can do is make sure the appraiser has all the data – Make sure the appraiser knows the roof and windows are brand new, and that you installed a $10k retaining wall last summer, and that the home is located in this school district vs that home a block or two away which is zoned for a different school.  Basically, help em out a little.  Lastly, it’s worth noting that if prices are rising dramatically it’s likely because there was a bidding war that drove the price of the home higher.  So, make sure the Appraiser has that data (Ie. Make sure they know there were X offers that escalated the price Y Dollars, and that the winning bid was only Z Dollars more than the next one).

But even with all the prep in the world, we may still get hit with a low appraisal.  What then?  Well, there are five options for how to deal with a low appraisal:

1. Negotiate with the seller to come lower in price
2. Buyer pays cash out of pocket to cover the low appraisal to keep their loan to value ratio the same
   1. Or a compromise of both – seller comes down a little and buyer pays up a little
3. Challenge the appraisal
   1. If there are mistakes on there, let’s notify the appraiser to have them update accordingly!  That could increase the value.  Or…
   2. If there are better comps that the appraiser should have used, let’s send those in and see if the appraiser will consider those vs the ones they used (or at least tell us why they aren’t using them).  Or…
   3. If there are pending transactions in the neighborhood that support the price of the home in question, maybe we wait until those other comps close, which then enables us to use those as a valid comp in the appraisal report (remember, appraiser comps have to be CLOSED homes, not pendings).
4. Switch lenders
   1. If a lender orders an appraisal and it comes in low, that same lender can’t keep ordering appraisals until they get one they like; but a new lender can order a new appraisal and cross their fingers
5. Back out of the transaction altogether

Take it Home

The first four months of any given year are low appraisal season because the housing market wakes up from its winter slumber and roars back to life with a vengeance.  Appraiser comps are almost always behind the times, even if they’re only a couple weeks old.  But just because it’s low appraisal season doesn’t mean we’re all sleeping gazelles – From prepping to avoid a low appraisal in the first place, to artfully handling a low appraisal after the fact