Financing a home purchase has become extremely difficult since the housing boom turned to bust. Getting an appraisal to match the price for which one's lender has preapproved a mortgage can be more art than science.
In June, a sizable share of U.S. purchase contracts for previously owned houses, signed 45 to 60 days earlier, were canceled by buyers because of appraisal/asking-price mismatches. In a month when real estate agents expected sales to rise, they dropped instead.
Having a contract fall through is tough on the buyer, and it leaves the seller, who might have contracted to buy a new property in anticipation of selling the old one, out in the cold, too.
Is there any way to salvage these deals?
Options are limited, said appraiser Maureen Fox of Maureen Fox Co. in Doylestown.
"Most times, when the appraisal comes in lower than the sale price, the sale price can be renegotiated," Fox said. "But many times, the seller can't afford to go any lower. Many buyers will walk from the deal if they believe they are over-paying."
Under federal law, buyers can obtain a copy of the appraisal from a broker or lender.
Challenging the appraisal generally is not an alternative, Fox said.
"If there is truly a reason to believe the appraisal is wrong," she said, "the lender still will not allow a second appraiser" to assess the property.
"Sometimes it's the appraiser's mistake, sometimes a seller is stubborn with asking price, sometimes the buyer is uneducated and sometimes the agent is mistaken," Fox said. "Bottom line, it's a tough market."
Jerome Scarpello of Leo Mortgage in Ambler, agreed: "I wouldn't waste time appealing unless there are blatant errors in the report -- like missed rooms adding square footage. An appraisal is an opinion of value, so unless there are some compelling reasons, opinions are rarely changed."
Still, Fred Glick, a Philadelphia mortgage broker and real estate agent, isn't so sure you shouldn't fight back.
"The buyer can challenge the appraisal," he said, "especially if the comparable homes were wrong or proper comps [short sales or foreclosures] were not used."
The best away to avoid such issues, of course, is to try to anticipate them.
"Have your real estate agent do comps before an agreement is made or before a property is listed," Glick said.
Fox, too, advised: "Be proactive, rather than scrambling around after the fact and after you paid for a home inspection, termite inspection and the like."
But thinking about appraisal pitfalls is not always front and center when what you want to do is buy a house.
And once the appraisal doesn't match the price, walking away from a sale is not as simple as it sounds. Canceling a contract can result in the buyer's losing some or all of the deposit.
Noelle Barbone, manager of Weichert Realtors' Media office, said, "If the buyer is using conventional financing with a strong loan-to-value ratio (a large cash down payment), he or she might be obliged to purchase regardless of appraised value, unless they have an appraisal condition added to their offer."
If an appraisal contingency was not signed, said Harry Pecci of Prosperity Mortgage in Doylestown, many lenders -- Wells Fargo, for one -- add a condition on the mortgage commitment as a matter of policy that the home "must appraise at the sales price."
"If the home does not appraise at the sales price, and the buyer had a mortgage contingency, this would be their way out as well," he said.
If the loan-to-value ratio is weak, according to Barbone, the buyer likely will not be approved for the mortgage unless the sale price is adjusted to match the appraised value.
If a buyer is financing under FHA and VA, she said, "the sales agreement has a built-in appraisal condition, giving the buyer the option to walk away with their deposit money intact."
Pecci noted that both sides in a VA or FHA transaction must sign the so-called amendatory clause. "It is not optional," he said.
Whenever possible, realtors, appraisers and mortgage brokers strongly recommend, try to renegotiate the sale agreement.
"I had one situation where they split the difference and another where the seller credit -- previously agreed to -- was dropped in exchange for the lowering of the sale price," Scarpello said.
Said Barbone: "In all of these cases, we review with the clients on both sides of the transaction some options that would keep the sale alive."
For the seller who is buying another home, there are different complications.
When the other house in question is new construction, Barbone said, the builder typically writes its own sales contract to protect its position.
"Most builders are not willing to compromise on certain things," said Barbone.
Defaulting on the purchase of a newly built home "may not be the smartest option," Barbone warned. "The financial loss would likely be greater than the appraisal differential on their existing home."
Compromising with the buyer may be a better way to go.
"If the seller is under contract for a home, they must seriously consider not letting their buyer walk away," Scarpello said.
The seller may be able to finance more on the new home to bridge the gap.
"All in all, this is becoming more of an issue," he said. "If the expectations are set at the beginning, then the buyer and seller realize this can happen and don't start packing until the appraisal is done."