As a real estate broker or mortgage broker, whose commissions often depend on the results of an appraisal, what should you do when that package arrives, and the appraisal is lower than needed to make the transaction work?
As the market continues to change, and many property owners in the market are still out of step, so I suspect that the idea of low appraisals will rise in occurance. Initially the inference of a low appraisal is the idea that the appraiser is simply wrong or incompetant. After all, everyone else already knows the number [Matrix].
But lets assume the appraisal is actually supportable, accurate and, well, right.
What should you do? This question is answered in a new Washington Post column called House Counsel by Benny L. Kass that addresses real estate issues from a legal perspective. In Low Appraisal? How to Keep a Home Loan and Sale From Collapsing [WaPo], the author says the appraiser works for the lender:
Whether the real estate market is hot or cool, home buyers and sellers can get upset when the appraiser who is examining a home on behalf of the mortgage lender sets a value below the agreed-upon sales price.
Even though the borrower pays the appraisal fee, the appraiser is really working on behalf of the lender — to determine how much a home is worth so that the bank doesn’t lend more than it should.
Here’s what I suggest (as an appraiser) and then I’ll add the article suggestions:
DO NOT call up and yell at the appraiser or get personal in any way. Do not relay this tone with the lender or any other parties in the sale.
Try to get and review a copy of the appraisal report if the borrower has it.
Provide objective comments about data that was overlooked and provide new info that can be verified and logic why it is better than what was originally presented.
Provide feedback about whether the appraiser familiar with the local market. In other words, do they cover it on a regular basis or have you ever heard of them (be careful what you say).
Assuming this goes nowhere or the appraiser (gasp) is actually right:
Buyers should talk to the seller. Even if real estate agents are involved, the author suggests that they should try to communicate directly with the seller and not go through the intermediaries. Explain that the appraisal came in very low and that they cannot afford to put up the cash difference. While they are obviously reluctant to lose their $10,000 deposit, that may be the only alternative.
Negotiate a lower price. The author’s definition of a dispute settlement is one in which both parties may walk away unhappy but nevertheless walk away. Perhaps the buyer can agree with the seller to split the difference between the contract price and the appraised value.
If the appraiser is unwilling to cooperate, ask the lender whether it is possible to get a second opinion from another appraiser. [This is often the case because real estate and mortgage brokers often get personal with their criticism of the appraiser]. The problem here is that the second appraisal is tainted since it was ordered by an interested part and will not be given the same weight, or any consideration by the lender, especially if the first appraisal appears to be fine.
In reality, the buyer should have no one but themselves to blame. As a buyer, they should insist on including the financing and appraisal contingencies in the sales contract in the current market. As far as the author is concerned, not doing so could be considered a form of contributory negligence. [yet it has been standard practice during the boom]. The broker is not at fault here.
If the appraisal is low, then there is a low chance that the deal will fly. So what’s the long term solution?
- First of all, appraisers need to manage their clients expectations and forewarn the client that there is a problem with the value and provide reasons why so the client can scramble.
Brokers (listing and buyer’s broker) should meet the appraiser during the inspection and be helpful providing relevant information such as data that can be verified (DON’T be a distraction on site though: I will scream the next time I am told “Here is the kitchen”).
Tell the appraiser about relevant contracts, listings, summarize the activity on the sale. If you provide information, make sure it can be verified and its not a bad idea to provide a little narrative as to why the property is worth what it sold.
I don’t want to hear that the property is fabulous.