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Inflated appraisals hurt home sales

Before you buy a house, you have to get it appraised to find out the true market value of the home. Normally, the amount the home is appraised for matches the amount that the buyer has offered to pay.

But sometimes this is not the case, and some big problems can arise. If a house is appraised for a smaller amount than what was offered, the whole sale could be in jeopardy.

Diane Hymer, of Inman News, writes about the problems with appraisals in her August 28, 2006 article, “What to do when appraisal doesn’t match purchase price?”

The process goes something like this:

“Most home buyers need a mortgage to buy a home. Before a mortgage is approved, the lender or mortgage broker usually hires an appraiser to verify the market value of the property. Ideally, the appraised value matches the price the buyer has agreed to pay.”

“When a property appraises for less than the purchase price, the transaction can be in jeopardy. However, a low appraisal won't necessarily stand in the way of the lender granting the loan if the borrowers are making a large cash down payment.”

The secret to not letting a low home appraisal jeopardize a transaction is to put down a large down payment. This cushions you so that in case it is appraised low, you have some cash on hand to make up for the difference.

“For example, let's say you agree to pay $1 million for a property, and you have $300,000 for a down payment. The appraiser puts a $950,000 value on the property, which is less than you've agreed to pay. You're a well-qualified buyer, so the lender is willing to give you a loan for 80 percent of the appraised value, or $760,000. With a $300,000 cash down payment, you only need a $700,000 mortgage. So, the sale can proceed unless you have a problem buying a property that appraised for less than you agreed to pay.”

The thing that stops a sale from being completed is when a buyer does not have this cash to make up for the difference between the purchase price and the appraised price.

This happens quite often if the buyer puts down a small amount of cash in relation to the purchase price, or no cash at all.

“Low- and no-cash-down buyers often wonder why it should make a difference to the seller how much cash they put down if they are approved for the mortgage. It can make a big difference if the appraisal comes in lower that the purchase price and the buyers have no additional cash to put down.”

If you find yourself in a situation like this one there are a few things you can do to help the situation.

“What can you do in this situation? One possibility is to ask for a second appraisal. There are a lot of new appraisers in the business today. Many don't have much experience. Make sure you insist on an appraiser who is experienced and knowledgeable in the area where the property is located. .

“Another option is to ask the sellers to renegotiate the purchase price. Although no seller is thrilled about accepting less than the negotiated price, this option may work if the seller's prospects of getting a higher price are slim.”

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