Low Home Appraisal Valuation: Now What?

In seller's markets, multiple offer situations often drive up

the purchase price higher than any comparable sales in the area, so sellers worry the appraisals will come in low. In buyer's markets, when prices are soft or falling, sellers are also concerned that the home will bring a low appraisal. Low appraisals can happen in any marketplace: hot, cold or neutral.

Why Do Low Appraisals Happen?

There are a number of reasons why appraisals come in low. Here are a few:

• Artificially inflated prices resulting from multiple offers.

• Declining market values due to fewer buyers shopping among a larger inventory of homes.

• Fallout from an abundance of foreclosure or short sales in the neighborhood, especially when no other comparable sales exist.

• Incorrect evaluation by the underwriter.

• Overpricing by the seller.

• Inexperienced appraiser who doesn't understand influences on value.

• Appraiser overlooked pending sale data, which could reflect higher comparable sales when closed, or the appraiser selected comparable sales from the wrong neighborhoods.

• Buyer receives cash back from the seller, causing lender to believe the price has been inflated.

• One factor that does not come into play is whether the lender wants to make the loan. Lenders want to lend money, and lenders are prohibited from redlining.

Solutions for Low Appraisals

Don't panic if the appraisal comes in low. It's tough to remain calm when it appears the pending sale will fall apart, but both parties have options:

1. Reduce the price of the house to the appraised value

As the seller, you can always sell the house at the appraised value without negotiating with anyone. This is the fastest way to “recover” from a low appraisal, but it could mean leaving money on the table. (And that’s always hard to swallow.)

2. Have the buyer make up the difference

In some cases, the buyer will have enough cash on hand to cover the difference between the appraisal and the selling price at closing. If the buyer feels confident that the value is there for her — despite the appraisal — she can simply add cash to the down payment, and the lender should be satisfied.

3. Meet in the middle

If both parties still want the sale to go through, it could make sense to split the difference, with the seller dropping the price a bit and the buyer adding cash to the down payment.

For example, if the difference between the sales price and the appraised value is $10,000, the seller could lower the price by $5,000 and get the buyer to bring another $5,000 to closing. This solution depends entirely on the relative willingness and financial positions of the two parties.

4. Challenge the appraisal

This option is a bit of a long shot. Only the appraiser’s client — the lender — can demand a review of the appraisal, and only the buyer can request a review or a second appraisal.

As the seller, you can support the buyer in this effort by sharing the competitive market analysis that you received from your agent or by giving her the results of an independent appraisal, if you have one. You also can offer to split the cost of a second appraisal if the lender agrees.

This route has long odds because the decision is ultimately up to the lender, and the lender doesn’t have the same investment in the transaction that the buyer and seller have. If the lender doesn’t have a compelling reason to doubt the appraisal, then that tends to be the end of the line. (In my experience, only a small percentage of these requests are granted.)

5. Put the house back on the market

If the buyer can’t or won’t put more money down, and you’re not interested in reducing the price, you can take your chances by allowing the deal to fall through and putting the house back on the market.

This can be disappointing to everyone involved. But if you’re in this situation because multiple offers brought the offer price above the asking price, then it might not be a bad way to go. You could get lucky and receive a cash offer when your agent relists the home. In that scenario, the appraisal won’t be an issue. Plus, even without the cash offer, another lender’s appraiser could have a more favorable point of view.

When considering scrapping your deal, don’t forget that at this point your house has been off the market for several weeks and you’re putting yourself that much farther from a closed sale.

This is where your agent is especially helpful. Your agent understands what the market is doing and can clarify your options so you can make the best decision for that moment.

HOME SELLERS: THE CURSE OF THE FIRST OFFER

Sometimes when everything goes right we have trouble accepting that fact. Perhaps nowhere is this phenomenon more clearly illustrated than in the case where a seller receives a good offer right away.

There are so many stories of sellers who refused to take a good, but not perfect, first offer, and who then waited a long, long time before finally accepting something else at a considerably lower price. And most agents who have been around for a while know to shudder when a good strong offer is made almost at the outset of a listing; for the seller's reservations are almost inevitable. "Did we list it too low?" "If someone will offer this much so soon, maybe we should wait a while and see if we can get more." Etc.

When we read in the news of homes in some areas selling well above list price, and when we've just recently come through a period when multiple-offer situations were commonplace, it is understandable that such thoughts come to mind. Nonetheless, they are generally unfounded, especially if the market is anywhere near "normal", as ours is today.

As an antidote to the ill effects of the "curse of the first offer", a couple of observations might be kept in mind.

First, the fact that an offer is received early in the listing period -- even in the first few days -- doesn't mean that the property has been listed too low.

It is easy to overlook how very efficient the residential real estate marketplace has become. Modern multiple listing systems (MLS) provide agents, and thus their buyer clients, with virtually instant access to information about existing inventory and about what has newly come on the market. In the old, old days a buyer's agent did not become aware of new listings until "the book" (i.e. the compilation of MLS listings) was published. There might have been a lag time of ten days or more from the time the listing was taken.

Today, a good buyer's agent will have electronically entered a "profile" of his client's needs and price range into the system. Then, whenever he logs on to the MLS, he will be notified if a listing has been entered that matches that profile. In a low-inventory market such as we have had recently, buyers' agents will log on a half-dozen times a day, or more, to see if an appropriate new listing has been entered. Moreover, in most systems the buyer's agent is able to place the buyer himself on a similar notification.

The point is that potential buyers learn quickly of the existence of an appropriate new listing. Thus a flurry of activity at the outset of the listing does not necessarily imply a too-low price; rather, it reflects the efficiency of the system.

Secondly, an early first offer does not imply that the seller should hold out for full price.

We all know that there is typically a bit of a dance in the pricing and negotiating for a property. Sellers, with the concurrence of their agents, will usually list their property for an amount that is both higher than what they believe its value to be and higher than what they would be satisfied to receive. Why? Because they know that buyers almost always want and expect to pay less than the listed price

However, when an otherwise acceptable offer comes in near the outset of a listing period, sellers are frequently tempted to hold out for full price, or much closer to it than would normally be expected. Caution should be exercised in this regard.

For one thing, as we have noted, exposure of the property to buyers occurs pretty quickly nowadays, and sellers shouldn't assume that there are going to be more, much less higher, offers as the listing period progresses.

Secondly, there often can be a transactional benefit to "leaving something on the table." A real estate transaction is a process. These days, with inspections and disclosures, there are almost always "second negotiations" during the course of escrow. A buyer who feels ground down in the purchase negotiation may well be more difficult to deal with as other issues arise.

Why Using A Realtor Is Important Whether You Are Buying Or Selling

Approximately 85 percent of home sellers use a real estate

professional to sell their homes. But did you know that buyers who are represented are also more likely to have a successful transaction?

Getting a purchase closed in today's market is complex. Buyers face many more hurdles including stricter financing and a confusing marketplace of listed homes, for-sale-by-owner homes, foreclosures and short sales.

Your area may be in a buyer's market with lots of inventory available and falling prices, or you may be in a seller's market with homes selling out from under you before you can write an offer. Either way, you'll be better off navigating the market with an experienced guide.

To take advantage of today's near-record low interest rates, attractive inventory levels, and price rollbacks from decade highs, you need a sales professional to help you close the deal.

A good real estate professional understands the current market. He or she has house-by-house neighborhood experience and help you obtain the right house at the best price and terms. Professionals share their knowledge of homes coming on to the market, through the multiple listings service and through networking.

You can search for homes online, but do you know about the homes coming onto the market? Your real estate professional will tell others about you to make sure you learn about upcoming homes for sale before they hit the online sites. Many homes are bought and sold this way, without a sign ever going into the yard.

Real estate professionals work primarily on commission. If the deal of the century is about to come on the market, who do you think your agent will tell? The buyer who thinks he'll get a better deal by working every agent, or the buyer who is loyal?

Here are some tips on how to work with your own agent:

If you want great service, show appreciation and commitment. 

• Get prequalified with a lender by sharing your financial records so you know exactly how much home you can buy.

• Work with only one agent. If it's customary in your area, sign a buyer's representation agreement.

• Stay in contact. If you want to look at open houses or builder homes, invite your agent to come along. If she's not available, show your loyalty by telling the salespeople you meet that you are already represented.

• Don't hide pertinent information from your agent, or she will be in the dark about key issues that could impact your transaction negatively.

• Once you find the house you want, the work really begins. You'll need help navigating negotiations, loan approval, seller's disclosures, inspections, repairs, and much more. Your agent will share your risk, and will make sure you go into any home purchase with your eyes wide open.

Take advantage of the greatest homebuying resource available - a real estate professional.

GETTING A HIGHER PRICE FOR YOUR HOME

The first offer is your reality check. If your agent told you to declutter, paint, repair and deep clean and you didn't do it, then the offer is showing you the error of your ways. Unless you do some drastic corrections, the only thing you can do is negotiate the buyer's low offer upward.

Negotiation typically works best when both parties get what they want. For example, you may be willing to take less money in exchange for a cash offer or a quicker closing. Your buyer may be willing to pay closer to your asking price in exchange for paying their closing costs, which could be several thousand dollars.

Your willingness to negotiate depends on several factors:

• Can you get something you want in exchange for conceding something the buyer wants?
•  What are your market's conditions? Do buyers have the upper hand or do sellers?
•  How badly do you want to sell? Are you willing to let a few thousand dollars stand between you and the next stage of your life?

Start from a position of strength -- an offer shows you have something the buyer wants. Unless the buyer can get the same thing for less elsewhere, you can safely counter the buyer's offer.

Keep in mind that a buyer will only pay what he or she believes your home is worth. Buyers respond to price, location, and condition. What you paid for the home, or what equity you need out of it, aren't relevant to the buyer.

Homes in top condition sell for the most money. You can't negotiate your home's location, but a poor location can definitely be improved by putting your home in the best condition possible.

If your home isn't spotless and move-in ready, then condition is likely affecting the price buyers want to pay for your home. You can either make the repairs and updates your buyer wants, or you can counter with a carpet allowance, pay HOA fees, or some other concession that will please the buyer.

Before you negotiate any offer, you need to know whether or not you have a solid, serious buyer. This is where your real estate agent is indispensable. Your agent can act as a go-between to make sure your buyer is qualified by a reputable lender.

A real estate agent can give you feedback on your home's price, location or condition, and make suggestions on where you can improve your negotiating position.

Once the buyer makes an offer, your agent can advise you how to negotiate the offer, based on the contract terms, and what she can find out from the buyer's agent about your buyer's motivations.

Your agent can't tell you what to ask for your home or what you should accept, but he or she can tell you what you can do to improve your contract negotiations.

If you don't agree to the buyer's terms, and counter the buyer's offer price, or change the day of closing, or some other term, the home is not yet under contract. Your buyer can initial his or her acceptance, and you have a binding contract.

Or your buyer can do nothing, and you may have lost an opportunity to sell your home.