It happens. You list your home, get multiple buyer offers, and settle on a contract price that exceeds your expectations and you sail through the option period unscathed only to get that terrifying email forwarded from the buyer’s lender:
Your home’s appraisal came in low.
All is not lost. Your agent will quote something about pricing like, “the market price is what a willing buyer is prepared to pay for your home,” and you’ll be heartened by that, only to be disheartened when the buyer says that they are no longer willing to pay what they were willing to pay.
What to do? The contract is explicit that you neither have to sell at the appraised price, but neither does the buyer have to buy at the contract price. Everyone isreleased from the obligation to buy or sell so what once seemed certain – the rapidly approaching closing date when you’d be on your way with a cashier’s check – is now so far up in the air it might as well be preparing to break the sound barrier by jumping out of a hot air balloon on the edge of space.
There’s an English joke about an Irishman being stopped in the street and asked for directions to the zoo. He stops and thinks for a bit and answers, “Well you don’t want to be starting from here.” Xenophobia aside, the same applies to getting the unwanted email – you don’t want to start negotiating from this place, you should have taken care of this before now.
Here’s how you avoid getting the email in the first place. First, as a listing agent, I look at the comparable sales that I believe an appraiser will use. We’re all using the same data, so I have to be on top of this. I’m not an appraiser by any stretch of the imagination, but I do play one on TV. So I can figure out what the best comparable sales are, and how an appraiser might value them. Going into a listing, I have a practical maximum sales price that can be underwritten by a lender.
The next step is to take this into account when negotiating offers for the home sale. If one buyer is willing to pay much more than this, then I look at terms that could be used to our advantage in the situation where the lender’s appraiser doesn’t see the value in the home to support the contract price. The phrase “find value” is often used, but that makes me uncomfortable – it sounds like the appraiser is in cahoots with the contract like a 4th grade science project suddenly finding the data that supports their experiment.
By looking at terms, I simply mean that if a buyer is asking for the seller to pay closing costs of 3% of the sales price, then that requires the home to appraise for 3% more than an equivalent contract with no seller paid closing costs, and an equivalently lower contract price. The latter has the same net proceeds to the seller, but with less appraisal risk. Another term written in the contract is this one:
“If the Property does not satisfy the lenders’ underwriting requirements for the loan(s), (including, but not limited to appraisal…), Buyer may terminate this contract by giving notice to Seller prior to closing and the earnest money will be refunded to Buyer.”
If a buyer is keen to buy and I don’t think the contract price will fly with the appraiser, I could ask my seller if they wanted to remove the appraisal contingency. I’m not a lawyer so I can’t tinker with the contract or change legal language, but if my seller wants to suggest striking out the appraisal contingency, I’m all about that.
The next thing I do is prepare for the appraiser by giving them the necessary paperwork to help with their appraisal, or make them aware of special circumstances that they might not easily observe – such as an analysis of lot sizes in the neighborhood if a home has an unusually large lot.
So that’s how to avoid getting the dreaded email. Pricing, negotiations, and preparation. But sometimes we get it anyway. Then what? Sure, you can protest an appraisal, though results vary. My approach when representing a seller at Mueller or beyond is as follows. It depends on the perceived financial capability of the buyer, and their willingness to buy. Sometimes we just keep the contract price where it is and go to close. Sometimes we concede some, and sometimes we negotiate for a compromise between the two values. How do we go about that? Well I can’t give away all of my secrets now, can I?