Today we're going to cover a topic that can throw a real wrench in your home sale process!
This hasn't been an issue too frequently in recent years given the strong market, but it does pop up from time to time.
Let's say you listed your house For Sale By Owner
. You received more interest than you expected, and ended up in a multiple offer situation. You had those buyers submit their best and final offer and you ended up with a sale higher than your list price. Awesome, right?
It is, but this can sometimes become a double-edged sword. In a strong market like this (frequently called a "Seller's Market") the sellers are in control. That means buyers compete for the few homes that pop up for sale. In a seller's market, homes typically only stay on the market for a day or two before being snatched up. Often times, buyers will miss out on a couple homes and finally become very aggressive, submitting high offers in the hopes of not losing yet another home to another buyer.
This is a great situation for sellers, but sometimes the inflated prices can have one downfall: sales typically need to be supported by an appraisal. Unless you are lucky enough to get a cash buyer who does not make their offer subject to appraisal, most buyers will submit offers that are subject to financing and/or subject to appraisal. This means the buyer's lender will be ordering an appraisal to justify to their underwriters that the loan is a "good risk" and supported by sufficient collateral.
For example, let's say the sales price is $275,000 but the appraisal only comes in at $250,000. A lender will only view that collateral (the mortgage on the home) as being worth $250,000 so they will typically not loan up to $275,000. That's a problem if you're a buyer that needs a loan up to the $275,000 sales price.
And this is the snag that will sometimes surprise an unwitting seller.
We typically see appraisal issues arise in two types of markets. The first is a weak market, where prices are depressed and there is a glut of inventory on the market. Homes are not selling. Prices have tanked. It's not hard to understand why a low appraisal could be a problem in this type of market.
The second type is a little more unexpected. Sometimes in a very strong market, we will start to see appraisal issues arise because of the scenario outlined above. Sale prices can get so competitive and so inflated that they just aren't supported by other market comps and appraisers have a hard time justifying the inflated price as a true value of the property. In other words, emotions may have led to a sky high offer, but the reality of the market comp data does not support that price. Also at play, the market is moving upward so quickly that it's not giving enough time for comps to be established in this new rarified air.
Ok, But What Do I DO About It?
If you're ready this post, I might have just described your situation. And the only thing you want to know is "What do we do now?" How can we fix the situation and still close without losing all that money I thought I had banked?
The good news is there are a handful of things we can try:
#1 - Review the appraisal and look for any obvious errors of false assumptions
Appraisers are not infallible. They make mistakes. They rush. Especially when the market is strong and they are overworked. So double check their work. This is not always an easy task, as appraisals can be very long and detailed. But it's worth the time and effort. Jot down any notes you find on things the appraiser has wrong, or things they overlooked. If you find some material issues to report, work with your buyer to report this information to their lender, who can then relay it on to the appraiser and ask for them to review their work and possibly issue a corrected opinion.
#2 - Get a second opinion
If the appraiser is unwilling to review your notes or change their opinion of value, you may need to get a new appraisal. A second opinion. If I hired 10 different appraisers and asked them all to value a property, and I didn't give them any guidance or tell them what the purchase price was, I'm willing to bet I would get 10 different valuations. Some may be very close but some may differ by significant amounts.
The point is, appraising real estate is an inexact science. It is not a rigid formula. There are dozens and dozens of factors that go into the final analysis and adjusting even just one or two different inputs can have a big effect on the outcome. It's like the Butterfly Effect
applied to real estate.
Not all lenders will allow a buyer to get a second appraisal in these situations, but some will. It's worth asking. As a seller, you could even offer to pay for the second appraisal if the lender would permit that. It might make a big difference.
#3 - Get a second opinion....from a different lender
If the buyer's lender won't allow you to get a second appraisal, sometimes the buyer will need to switch lenders and start the process over somewhere else. By switching lenders, the buyer will get a second bite at the apple with a new appraiser. I've seen this have a positive result many times.
The key to #2 and #3 are a buyer who loves the house and wants to do everything they can to make the closing happen, because these require buyer cooperation. It's the buyer who is the liaison to to the mortgage company, so they have to make the effort on these two.
#4 - Split the difference, or find another source of funds
If you've struck out on numbers 1-3 above, we enter the negotiation phase. At this point, perhaps an offer to "split the difference" with the buyer could work. The buyer's lender will still be limited on what they can lend based on the appraisal, but perhaps the buyer can make a bigger down payment, either with their own funds or with some gift funds from a family member or another source. A creative (legally creative, that is) buyer and lender can often come up with several options here to bridge the difference.
#5 - Negotiate downward
If you have a buyer that is not willing to make any concessions, that often leads to a situation where the Seller has to make a tough choice: adjust the purchase price down to the new appraised value or allow the buyer to walk away.
If you have a buyer that's in love with the property and they are afraid they won't find another home as good as this one (because the market is strong and inventory is low) or they just happen to love your unique home, chances are we've had some success somewhere above in this list of options. But if you have a buyer that is not totally in love with the home or they are getting cold feet or they just haven't had any luck with the options above, then they'll be asking you to lower the purchase price.
Your options typically are to lower the price and proceed to closing or.....
#6 - Move on to a new buyer
It might be time to release this buyer to a new property and search for a new buyer. If you're confident the home is worth the sales price and you just had a bad appraisal, this may be a viable option for you -- assuming you have time to put the house back on the market and look for a new buyer. This again gives you a "second bite at the apple" where you'll end up with a new buyer, a new purchase price, and most importantly a new appraiser.
Other Tips and Tricks
After the regulatory changes arising from the 2008 market crash, mortgage companies can no longer hand pick the appraiser they want. They have to randomly select from an approved list. But they still have discretion on which appraisers they add to their list of approved appraisers. In my experience, I've found that smaller banks, regional banks, or local credit unions all tend to have connections to appraisers that, on average, have a much better understanding of the local market and are more successful in getting a good appraised value. Larger banks, in contrast, tend to be much more out of touch with what is going on locally. This can make a huge difference.
Also, when you let the appraiser into the property to do their inspection, use that opportunity to educate them on the property. Point out any unique features, any upgrades, any selling points about the location, etc. Tell them anything they might not otherwise know or discover on their own. Remember, no one knows this property better than you do. Educate them so they can make the most informed decision when writing up their report. Was it a multiple offer situation? Did it sell over list price? These are all critical factors your appraiser should know.
Can We Help?
If you need lender recommendations in the greater Des Moines area or assistance with your For Sale By Owner
, we can help! Please contact us at the red button above.