Can I Get a Refund if my Appraisal Comes in Low?

Westcoe Realtors, Riverside California…This was a question recently posed to us by one of our buyers, and given the current state of the real estate market regarding appraisals, it is a very good question since this scenario is not exactly unique.

And the answer is…..NO.  But allow us to do a little explaining (although the answer will still be no).

Right now, at least in Riverside, the process of buying a home borders in the insane.  There are so many people who want to buy, and so little property to choose from.  Banks are under a moratorium at the moment that limits the number of repos on the market, and “normal” sellers will generally not return to the marketplace until prices rise and they have some equity.  So…we are left with a lot of potential buyers, and not much available to purchase.

In a normal market (not like the one we have now), this situation of limited supply coupled with rampant demand would result in rising real estate prices.  Most properties now get around a dozen offers, and this “bidding” frenzy almost always leads to a sales price higher than the original list price (see previous blog postings on MLS statistics).  However, that is not happening yet, because there is a third party to your transaction that is creating a major buzzkill at the moment…and that is the appraiser.

Buyers and sellers can agree to whatever they want on the sale of a home, but unless the buyer is paying all cash, the third player to your game is the buyer’s new lender…and we must all play by their rules or the new lender takes the ball and goes home, and no one gets to play at all.  In this case, the “ball” is the new loan, and the representative for the bank is the appraiser, who has the duty to make sure that the lender’s “ball” will be safe.  Ergo, we must please the appraiser, or the whole transaction goes the way of the Titanic.

So…after all these offers on a property have been narrowed down to one lucky buyer, the buyer’s new lender gets involved and performs an appraisal on said property.  Normally, in a sane market (again, not like the one we have now), this appraisal process is orderly, and results in very few surprises.  Since everyone (buyer, seller, real estate agents, and appraiser) is looking at the same data, then almost everyone comes to the same conclusions, and the transaction proceeds from there.  However, not today.

In today’s world, while the buyer and seller can most often totally justify the higher sales price based upon the market activity, supply and demand, upgrades, etc…the appraisal world is still reeling from being unfairly blamed for the real estate pricing crash of 2007.  As a result, the entire appraisal industry (in this humble servants opinion) has over reacted and is now determined to make sure prices do not rise quickly again.  Much of this is the result of new government regulations designed to “protect” buyers from themselves, but in reality, all these regulations have succeeded in doing is to raise the cost of an appraisal a buyer must pay for…and to add insult to injury, when the appraiser reacts to the new regulations and clamps down on the higher price the buyer was forced to pay (remember that bidding frenzy the buyer had to endure to just get the offer accepted?), the whole transaction comes tumbling down like Humpty Dumpty’s Wall.

The seller refuses to drop the price to the ridiculously low appraisal price, and the buyer cannot obtain the financing for the higher sales price.  The end result?  Everyone walks away mad, and the buyer has spent between $350-$500 for nothing.  Nice system, eh?  And the buyer cannot ask for their money back because the appraiser did the job he/she was paid to do…appraise the property under the current guidelines established by your protective government.  So…the very rules that were supposedly established to protect the buyer have actually cost the buyer a nice chunk of money and kept them out of the home they wanted to buy and the seller wanted to sell.  This happens every day in our Bizzaro world of real estate.  Honest, I couldn’t make this up if I tried.

So..what to do?  Well, until the ways of appraisers change, we all must grin and bear it, and hope for the seller to drop the price, or the appraisal industry (remember: it is the industry here at fault, not the individual appraisers…they have their hands tied)  to loosen-up a bit…and who knows which will happen first.  Until then, we will all just have to continue to make all the lemonade we can with the lemons that are tossed our way.

Thanks, and as always, let us know if you would like any real estate issue addressed here on our blog.