I’ve never delivered a low appraisal, but I’ve seen a few high sales
-Anonymous Real Estate Appraiser
When buying a home, if you pay cash, you can pay any price you want. But if you are borrowing any of the money, there are rules.
Chief among them: Your lender will obtain an appraisal on the property to determine whether the price you and the seller have agreed upon makes sense. In other words, is it supported by other recent, similar or “comparable” transactions.
It’s really a lending 101 concept, which simply asks: Is the collateral for the loan worth what the buyer/borrower and seller says it is? To answer this question, a third party appraiser is hired for an independent opinion of value.
Sometimes, the appraisal comes in below the price. When this happens (assuming the appraisal is accurate – even the best appraisers are human, after all) you have a few choices.
- You can renegotiate the deal with the sellers.
- You can put your money where your bid is pay the difference in cash.
- You can mutually cancel the deal and move on.
In practice – most transactions are renegotiated or die when an appraisal does not confirm the price.
All of this you probably know, but here’s something you probably didn’t:
A few lenders are using so-called automated valuations to determine whether you even get the chance to take your chances with a real appraisal.
It’s like a pre-appraisal appraisal, where a few thousand lines of computer code decide, Deus ex Machina style: Not at this price, no matter what a real, human prepared appraisal might say.
The problem with this is, an automated valuation is not a real appraisal. Sure, many of the same data inputs that an appraiser uses, such as comparable sales, home characteristics and time adjustments, are used; but they are nowhere near as accurate in their ability to do the things that good, competent, human appraisers do. As a result, automated appraisals often skew low, especially in areas where there may be a high concentration of recent distressed sales.
At this point it is unclear how widespread the practice is, but we’ve had a few reports we can confirm locally.
So, can the computer kill your deal? Maybe.
If you are a buyer, it’s a question worth asking your lender before you start house hunting.
If you are seller, it is a question worth asking the buyer’s lender before you accept their offer.
Are you a home buyer, seller or Real Estate Agent that has had a deal die over an automated appraisal? I’d love to hear your story: email@example.com