Phoenix Real Estate | Phoenix Homes for Sale | All Phoenix Real Estate » 2008 » January

Buyers’ Protection on Appraisals

Jonathan Dalton, Phoenix Real Estate Agent I nearly titled this Appraisals in Phoenix Real Estate but stopped when I saw how often Phoenix Real Estate has wormed its way into titles of late. There’s little as stultifying than packed keywords - effective occasionally, desultory after repeated overuse.

In any event, today’s topic is the appraisal. Mention the word right now to agents in the ~~Phoenix real estate market~~ here in the Valley and most begin to shiver. Big bad banks have decided that we’re a declining market (they just realized this?) and are taking 5 or so percent off the appraisal to determine the loan amount.

Well, at least in some cases.

This afternoon we’re closing escrow on a home in Desert Hills. The buyers have spotless credit and because of this the bank performed a drive-by appraisal. What is a drive-by appraisal? It’s where the appraiser has someone photograph the front of the house and then they run all the comps from the computer and say, “Yep, looks fine from here.”

They can do this because appraisers working on a bank’s behalf aren’t particularly worried about the intrinsic value of the house. They only are providing information to justify (or not justify) the risk the bank is taking in offering a loan on the property.

Real fun ensues when appraisers disagree. One appraiser called me on a property sold last winter asking why the sales price was so low. “Becuase,” I answered, “the appraisal came in that low and we didn’t have a choice.”

She then began wondering where the appraiser got the numbers because the sales figure seemed to be too low. I’d reviewed the appraisal and there wasn’t enough there to try and protest but my gut told me my seller had been screwed.

But here’s the thing … the Arizona residential real estate contract has built-in appraisal protection for the buyer:

2c. Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.

Fair enough, but what does it mean?

The buyers’ loan is going to be for the lesser of the sales price or the appraised value. If the appraisal doesn’t come in for the sales price, the buyer has the option either to cancel the contract or bring in the cash to make up the difference between the loan amount and the sales price.

While not part of the contract, the seller and buyer also have the option of negotiating a price somewhere in the middle. One of my sellers lowered their sales price to the rather debatable appraisal value. Another held out and the buyer paid an extra $3,000 out of pocket for the property.

This one paragraph often was ignored back in 2005 when many listings contained the warning that appraisal contingencies had to be waived. This week’s laugh-out-loud moment came when I saw a home currently on the market that said the buyer would have to waive the appraisal contingency.

Yeah, that’ll happen.

Many buyers express concerns about a home’s ability to appraise. Some look at the most recent sales and don’t believe that’s the current market value, much as some sellers look at the same data and believe their home is worth more than what the sales say.

Sellers in that position should make themselves comfortable because they aren’t going to be moving. Buyers wondering about an appraisal, though, can write their offer knowing that if the appraisal doesn’t come through at the sales price, they stand a good chance of either getting the home for less or at least walking away with their earnest money intact.

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