12% of home sales fall through due to low appraisals

As competition for limited housing inventory intensifies, buyers are bidding up home prices. But many have found that the tactic of making an aggressive bid to beat out other offers backfires, as the appraised value of the home falls well below the agreed price.

The National Association of Realtors’ latest Confidence Index Survey, based on a poll of real estate professionals’ transactions, found that 23% of all sales were delayed due to appraisal issues and that 12% of the proposed deals ultimately fell apart as the problem could not be resolved.

“I don’t remember any time when the frequency of buyers being willing to pay so much more than the market data was this high,” said CoreLogic’s chief appraised Shawn Telford in an interview with the Wall Street Journal.

With existing home inventories at record lows, bidding wars among buyers have become extremely common over the last year. Many prospective buyers are stretching their budgets to the max in their desperation to buy a home, and that often means they bid well over the odds for the home they desire.

While that may get the attention of the seller, it can be an issue if the buyer needs to secure financing to fund the purchase. Mortgage lenders will typically only lend the amount to cover the appraised value of the home, as opposed to what the buyer might think it’s worth. So, once a bid has been accepted, the mortgage company will send an appraiser to go and value the home. If the appraised value of the home comes in lower than what the buyer is offering, the mortgage company won’t provide the financing as it considers the loan to be too risky. In that case, the parties need to renegotiate – but if the seller won’t agree to a lower price, the buyer must come up with the extra cash, or else the deal falls through.

Appraisers typically factor in comparables such as recent closed and pending home sales of similar properties in the area to determine a home’s value. But sales can take as long as two months to close after going under contract, and during that time prices can move up or down fast. Some sellers complain that appraisals aren’t keeping pace with the rapid price growth seen in many U.S. markets today.

But appraisers say they carry out very thorough assessments that factor in more than just local market conditions and what the buyer is willing to pay during a bidding war. They claim that part of their job is to protect buyers from overpaying.

“In a frenzied market it is harder to nail down what true value is,” Jonathan Miller, chief executive of the appraisal firm Miller Samuel Inc., told the Journal. “Just because the appraiser doesn’t agree with the purchase price, whatever the reason, it doesn’t mean they’re wrong.”

To deal with low appraised values, some buyers simply waive the appraisal contingency -essentially they’re promising they’ll make up whatever the difference is in cash. But that is happening less now than it was before, with appraisal contingency waivers occurring in 25% of residential real estate transactions in August, down from 27% in July.