*#%*@! The Appraisal Came in Low

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In the good old days of selling real estate in 2019 when an agent put their brand new listing on the market, they would spend the first couple of days orchestrating their marketing plan to give the property as much exposure to potential buyers as possible. In today’s hyper-low-inventory market, if the listing is priced right, it is not uncommon to receive five to 10 offers in the span of 48 hours even before an agent’s slick social media posts hit Facebook and Instagram.

In many instances when the listing agent presents these agreements to the seller, more than half if not more, are written up at a price above list . . . and some significantly more! And many buyers are tripping all over themselves to try and put their best foot forward by eliminating inspection requests and appraisal contingencies. All seems well in the seller’s world until they receive word from their agent that the appraisal came in $XXXX under the sales price. Now what do you do?

Before we get into what options are available, let’s turn back the hands of time. If you are the listing agent and your property goes under agreement, don’t leave things to chance. Find out who is going to be performing the appraisal of the property from the buyer’s lender, and provide the following information to them:

  • The number of showings on the property — If it is a big number, this will tell the appraiser that the property was in high demand which could alter their opinion.
  • The number of offers the seller considered — If the seller considered numerous offers, the appraiser may be more apt to bump up their appraised value.
  • Comps used in the Comparative Market Analysis — Don’t assume the appraiser will consider the same comps as you did when you put together your CMA.
  • A list of upgrades and updates — Sometimes big-ticket items that add value to the home may get lost during the appraiser’s walkthrough.

Assuming you provided all of these items to the appraiser and still get a low appraisal, what should you do next? Don’t throw in the towel just yet. There are a number of options available to the parties, and it’s your job to go over each one with your client.

  1. Buyer Can Make Up the Difference in Cash. If the buyer has lost out on a number of properties because of previous competing situations, they may be a little frustrated and be willing to shell out some additional cash to get the property they want. Keep in mind, a low appraisal doesn’t mean the lender won’t lend — it just means that the lender will only make a loan based on the loan-to-value (LTV) ratio agreed to in the agreement of sale.
  2. Buyer Might Pay Some of the Seller’s Closing Costs. As agents we’re so used to having the seller pay some of the buyer’s closing costs. Take the shoe off, and put it on the other foot. Perhaps the buyer could offer to pay some of the seller’s costs. Obviously, make sure the type of loan the buyer is obtaining will allow this option.
  3. Reduce the Sale Price to the Appraised Value. The seller is very seldom happy with this option; however, if the listing agent has done their job and explained to the seller at time of accepting the agreement that the comps don’t support the value, they have laid the groundwork for this discussion. If the seller is still adamant about not reducing the price even though they know that the buyer may terminate the agreement, explain to the seller that there is no guarantee that the next accepted offer will have an appraisal that is any better than the first and the seller may be in the same boat . . . only 60 days later.
  4. Each Party Gives a Little. Sometimes the best option is for the seller to lower the sales price a smidge and the buyer agrees to pay a little bit more in cash. This requires both parties to set aside their entrenched positions and soften their stance a little. As agents this is where we earn our keep . . . by getting the parties to see things from another point of view.
  5. The Seller Agrees to Carry a Second Mortgage. If the seller doesn’t need all their money out of the transaction immediately, they may be willing to help finance a portion of the sales price so that the buyer doesn’t have an additional cash outlay at the settlement table. (CAUTION:  If you decide to pursue this option and the buyer and seller agree to the amount, term, interest rate and balloon amount (if any) for the second mortgage, an attorney should draw up the paperwork).
  6. Review the First Appraisal and Possibly Request a Second One. If you’re the listing agent, request a copy of the appraisal from the buyer’s agent to review it. There may be calculation errors or good comps that were missed when putting together the appraisal. If you are asking the appraiser to reconsider their position, back it up with facts and not emotion. Oh, by the way, the appraiser is under no obligation to reconsider anything, but it doesn’t hurt to ask . . . so ask nicely. If the seller wants to pay for a second appraisal and the buyer is willing to support that request, make that request known to the lender. Keep in mind that the lender is also under no obligation to honor the appeal.
  7. Terminate the Transaction. This should really be the last option to consider. From the buyer’s perspective, they are walking away from a home that they fought hard to get under agreement. There is no guarantee that they will find another home that they value as much as this one. From the seller’s perspective, they now have to go through this whole process again with no guarantee that the result will be any more favorable.

Prior to reviewing all these options with your client, make sure that these are available to the parties based on the type of mortgage the buyer is obtaining. You don’t want to work hard to get the buyer and seller on the same page only to find out that what they’ve just agreed to is not possible because of the type of financing. Whatever option is ultimately agreed upon, make sure you memorialize the revised terms in an addendum to the agreement of sale and forward copies to the mortgage company and settlement agency so that they have a complete and up-to-date file.

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