The housing market has picked up steam lately, but one of the side effects of the sudden improvement is that home appraisals often take longer than they used to, and often come in with a much lower value than what everyone expected. This is causing a number of house sales to collapse.

Appraisals are taking longer because there’s suddenly more demand for them, at the same time that far fewer people are working as appraisers than during the boom years.

This is understandable, but the problem with a slow appraisal is that it can sometimes cause a purchaser to lose an interest-rate lock, which can be a big problem at a time when interest rates are rising.

The main reason that appraisals are coming in lower than expected is that prices have risen so quickly lately. If an appraiser values a property by using “comparable sales” from a year or even six months ago, those sales might not reflect the most recent changes in the market, and might result in a surprisingly low value.

And that can mean that a house is suddenly out of reach for the buyer.

For instance, suppose a buyer agrees to buy a home for $400,000, and plans to put 20% down. He or she would expect a down payment of $80,000.

But if the appraisal comes back at only $350,000, and a mortgage is approved based on that amount, the buyer might have to put up $70,000 (20% of the appraised value) plus $50,000 (the difference between the appraised value and the purchase price), for a total down payment of $120,000. That could easily destroy the sale.

Appraisers don’t take chances

While the market itself is heating up, and buyers are becoming more aggressive, many appraisers are still trying to be as conservative as possible.

During the height of the real estate boom, real estate agents and mortgage brokers often played a big role in selecting appraisers. As a result, many appraisers felt pressured to turn in optimistic numbers, fearing that if they didn’t, they wouldn’t be hired again.

After the housing bubble burst, though, the federal agencies that control the bulk of residential mortgages, such as Fannie Mae, barred real estate agents and mortgage brokers from choosing appraisers.

This spawned a new industry, called “appraisal management companies,” or AMCs, that hire appraisers to provide independent valuations to lenders. Today, about 70 percent of appraisals are done through AMCs; most of the rest are done by in-house appraisers who work directly for banks.

The result is that appraisers today have no incentive to be optimistic, and in fact often have an incentive to be pessimistic because they’re afraid they’ll get in trouble if a high appraisal leads to a bad loan and a default.

In addition, AMCs keep a lot of the money that used to go directly to the appraiser, so appraisers receive less compensation for each job. They have to look at more properties in less time, often in areas they don’t know as well, in order to make the same income. This can result in a less careful, lower-quality appraisal that doesn’t capture the dynamics of an advancing market.

What can be done?

There’s no easy solution to this problem, but there are things that sellers and buyers can do to improve their situation.

In some hot markets, sellers are demanding that buyers waive a mortgage contingency – even if the buyers are pre-approved – out of fear of a low appraisal.

Buyers and sellers can also agree in their contract on what will happen if the appraisal comes in low. For instance, they might agree that if the appraisal is under the purchase price but more than 90% of the purchase price, the seller will reduce the price by half the amount of the shortfall.

Buyers who come up short can also try switching lenders and getting a new valuation.

Sellers might want to pay for their own appraisal before putting their home on the market, just to get a sense of what a “safe” price might be, and what problems might occur.

Sellers might also want to provide the appraiser with their own list of comparable sales, home improvements (with costs), and neighborhood changes. It’s particularly important to include improvements that might not be obvious on a brief inspection, such as new insulation or a new roof.

Also, it’s good to let the appraiser know of any recent comparable sales in the neighborhood that were conducted without a real estate agent (because they might not show up in the appraiser’s database), or that were foreclosure or short sales (because this fact might explain a low sale price).