When a homebuyer is getting a mortgage to buy a new home everyone seems to be on pins and needles waiting on the appraisal. When the appraisal does come in if the appraised value is below the contract price the response is usually alarm from the realtors and confusion by the homebuyer. At that point there is a lot to talk about and coordinate.
Appraisals are backwards looking documents by nature since they use comparables that have already sold. Comparables are not usually only days old, comparables are usually months old and sometimes even quarters old. Hence, they use older data by default that make them backwards looking documents. In a hot market where prices are getting bid up in multiple offer situations it can be hard for older appraisal data to keep up with the current escalating bids.
See Also: Waiving Appraisal Contingencies
Appraisals are subjective to some degree. You can send out 10 different appraisers, or 10 different realtors and get multiple different assessments of the value of the property. Different people will value different attributes of a property in different ways, such as lot size, room size, level of finish, view, etc. Realtors, sellers and buyers may put unreasonable valuations on these things that are very subjective more so than an appraiser who is following more rigid guidelines. So sometimes it can become difficult to get home buyers, home sellers, realtors and appraisers all to agree on the value of the property.
See Also: What Is A Proper Comp?
Realtors can know more about the value of a property because they can have more local and specialized knowledge about a neighborhood, more than an appraiser who is appraising a wider area which means they will have less local knowledge. But Realtors, sellers and buyers tend not to know the exact guidelines that appraisers have to follow to arrive at a valuation. One example is that below grade bedrooms and bathrooms do not count in the GLA (Gross Living Area). The guidelines that appraisers follow are from the Uniform Standards of Professional Appraisal Practice, also called USPAP. Valuing a property by guidelines versus valuing a property simply by market knowledge can yield widely different results.
See Also: Appraisal Challenges
What happens when an appraisal comes in low? Some realtors go appraisal shopping, meaning they will call in a second or even a third opinion in hopes of getting a higher appraised value. Sometimes there will be a negotiation between the buyer and the seller to adjust the contract price lower, or have the buyer come up with the difference in cash, or some combination of the two.
In a sellers market when an appraisal comes in below the contract price you may need to be prepared to pay the difference in cash if you do not have an appraisal contingency.
See Also: Waiving an Appraisal Contingency
The bottom line is that appraising a home can be a tricky proposition. After all, what is something worth other than what someone is willing to pay for it. There may be multiple bidders on a property and you may even make the highest offer, however that does not mean that it will appraise for that number just because multiple people thought it was worth above a certain price level. And in a hot market when values are increasing quickly buyers have to be ready for the repercussions.