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The market is up, but can that be supported for the buyer’s lender?

Sitting at my desk yesterday afternoon, grinding away at the paperwork and phone calls that are inherent in a busy real estate practice, I answered a call from another Flagstaff real estate agent: “What’s happening with your listing on Dory Trail?” she asked. She said she might show it this morning depending on how things went for her clients’ negotiation last evening. (Great! We love showings!)

Her clients had found a wonderful house and reached agreement with the owners on price and other terms to buy. They had gone through the inspections successfully, and then their lender’s appraisal reported that recent comparable sales couldn’t support the sales price the buyer and seller had agreed to. I’d have to go back to count to see how many times this has happened to transactions I’ve been involved with so far this year. It’s been a lot. However,  going on to the next house is usually not a solution (although sometimes it’s a last resort.)

The problem is with the market, not usually with the price of a particular house. Flagstaff real estate is rising in value (though not as quickly as some believe and not in all segments of the market). Appraisers must use past sales to justify their appraisal price and until there are enough of those sales on record, buyers and sellers are often going to be eager to transact at prices higher than appraisers can justify. That means the buyers cannot get the loans they want and/or need to purchase the home.

When an appraisal comes in low, there are several ways to save the transaction if the buyer and seller agree:

If the buyer is using a conventional mortgage, the mortgage company can submit an appeal to the original appraiser or order a second opinion appraisal.  It will be up to the underwriter of the loan whether or not to accept the second appraisal over the first; however, the lowest appraisal is likely to control. A buyer can change mortgage companies entirely and start the whole appraisal process over but there is certainly no guarantee that the new appraiser will find anything better to support a higher appraisal. If the appraisal was for a FHA or VA loan, there is no starting over.  A FHA appraisal sticks with a home for at least 6 months and I believe a VA appraisal does the same.  If a buyer can switch from a FHA or VA loan to a conventional loan, their mortgage officer can order a new appraisal.

Alternatively, the parties can negotiate a new price.  This is how most low appraisal situations are solved. The seller agrees to a reduced price and/or the buyer makes a larger down payment.  There might be creative ways to reach a settlement, including changing the buyer’s loan program.  An increased rate could allow closing costs to be rolled into the buyer’s loan, giving more cash for a down payment.  Even though the interest rate increases slightly, the reduced purchase price keep monthly house payment affordable.

The potential for low appraisal results is just one reason it’s important to have an experienced, calm, and aggressive agent representing you in the purchase or sale of your Flagstaff home. Learn about our full-service Flagstaff real estate sales team: Flagstaff Elite Team at RE/MAX Peak Properties.

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