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How Real Estate Appraisals Affect Sales
Dated: September 15 2020
Appraisals are typically ordered by a lender, although owners can purchase a home appraisal on their own. Appraisals are done to protect the lender. An important thing to remember is that an appraisal is a RANGE of acceptable pricing for a home. Or, as John Wake says in his blog at https://realestatedecoded.com/the-untold-truth-of-home-appraisals/:
"Fair market value is a price range, not a single dollar price. That means before an appraisal will come in low, the contract price has to be unambiguously above the ambiguous fair market value range."
Does Knowing the Contract Price Change the Appraised Value?
The short answer is: YES. A study was done on appraisal values before vs. after homes went under contract. The data used came from 8,533 homes foreclosed on, then subsequently resold, from 2012-2015. During this time, Fannie Mae took ownership of these homes due to foreclosure. At that time, Fannie May had every home appraised to determine list prices. Later, when the homes went under contract to buyers, each home was reappraised by the lender. Remember, during the 2nd round of appraisals, the appraisers knew the agreed-upon contract price for each home. The study found what is called a strong "confirmation bias". There was a major shift in the home values once the appraisers knew the agreed-upon value."Looking at the exact same 8,533 homes.
When the appraiser didn’t know the (future) contract price, only 45% of the appraisals came in at or above the (future) contract price.
But when the appraiser knew the contract price, 93% of the appraisals came in at or above the contract price." (Wake)
What Happens When an Appraisal Comes in Low?
In this particular study, when an appraisal came in low, the odds of the contract not closing increased by almost 10%. Why?
The lender will not loan as much - because the home is not worth as much.
Buyers, therefore, need to pay the balance out of their own pocket in order to close - UNLESS the seller agrees to take less.
If the seller will not accept less than the contract price, and the buyer can't come up with more money out of their own pocket, the deal will fall apart.
The simple fact is that a lender cannot loan for more than the appraised value of a home.
source: "The Untold Truth of Home Appraisals", By John Wake https://realestatedecoded.com/the-untold-truth-of-home-appraisals/
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