As brokers, the primary job of bringing buyers and sellers together on a price usually seems like the bulk of the work, but it’s really only half the battle. Inspections, taxes, insurance and financing are just a few of the outside forces that need to be satisfied before closing.
The third party playing a critical role in the process is the appraiser. This is the uncompromising professional who operates and is bound by independent standards and rules.
So, what happens when the appraisal comes back lower than the negotiated price?
Unfortunately, nothing will happen automatically unless this scenario is previously spelled out in the contract. It’s up to brokers to get back to work and recalibrate new terms for the transaction.
“It depends on the buyer,” says Chris Bradford, broker of Lifestyl Real Estate in Indiana. “They may be cash-strapped, [but] if they have enough for 20 percent down, they might have enough if it doesn’t appraise.”
A short appraisal changes the leverage landscape of the deal. Even if they have the cash on hand, buyers won’t be as inclined to honor their offers once they know the underlying asset has a smaller basis price. Sellers could have to come down halfway between the agreed-upon price and the appraised value—or even lower, depending how badly they want to sell the property.
Bradford notes that sellers might not be able to come down much because they might need to make a certain amount of money in order to fund their next purchase. In that event, it’s incredibly hard to keep the buyer at the same price, but it’s also difficult to start over, knowing that any other buyer would likely have the same appraisal issue.
Other than renegotiating, brokers have limited options:
Appeal the appraisal. Most mortgage companies allow for such a challenge, but the chances of getting a higher valuation are slim. Assuming the appraiser didn’t make a mistake and has legitimate comps to support the appraisal, lenders will typically stand by their vendors. If the appraiser was from an area outside of where the home was located, there’s a better chance he or she missed something noteworthy, such as the proper school district; the fact that someone is willing to borrow more to attain the property doesn’t change the valuation formula.
Seek out another lender. A different bank would use a different appraiser, and that person could see things differently. You could even stage the property better, provide suggested comps that support a higher valuation, and call out improvements that might have been missed during the first appraisal. Shy of directly telling the appraiser what to do, this guidance may help your cause if the appraiser is open to hearing your suggestions. The risk is that the buyer would have to pay for this work whether or not the second appraisal comes up—and it usually doesn’t, Bradford says.
Find another buyer. Starting over is challenging, but much of the groundwork would still be in place from the previous listing and marketing process. A good place to start is with people who were already interested in the home or had lost out in a bidding war. If Offer A was $50,000 short of the winning bid, and Offer B is more than $100,000 higher than the appraisal, then Offer A would be better than compromising 50/50 on a reduced price. Of course, that assumes the new buyer can cover a short appraisal.
Walk away. As tough as it is to lose a deal, especially one that gets very close, there might be no choice but to walk away. If your seller does decide to terminate the contract and pull the listing, it’s a good idea to pay attention to comps in that area for the next six months in case there’s a verifiable upswing that would justify the price your seller needs.
Since many agents are inexperienced with appraisal shortfalls, Bradford says that it’s critical for brokers to educate their team on how to handle such situations. Equally important, he says, is to educate clients about this possibility—especially in low-inventory markets, where short appraisals are more likely—so that it’s not such a shock once it happens.
Of course, the best way to defend against these appraisal threats is to ensure that they never occur in the first place. Andrew Hillman, broker of Hillman Real Estate in Massachusetts and New Hampshire, says that “the strategy should start well before the appraisal is complete.”
Hillman recommends a proactive approach to prepping the appraiser and securing a higher down payment from the buyer.
“It’s the broker’s responsibility to provide the appraiser with details that aren’t stated on the listing sheet,” Hillman says. “For example, if the broker received multiple offers, this is information that the appraiser needs to know. This would show that the market determined the value with the demand exceeding supply. This holds weight.”
While a short appraisal presents a variety of problems for a deal, Sep Niakan, broker of HB Roswell Realty in Miami, Fla., notes that it can also create an opportunity for savvy buyers if sellers won’t come down to market price.
“The idea is to lock the deal in for the buyer as a first step, especially if there might be other buyers interested in the property. If the agent is confident that there are no comps to get the home appraised at the agreed-to-purchase price, they can wait until the appraisal comes in low and use that as a bargaining tool to get the price lower,” Niakan says. “The buyer is happy, and the seller is much more likely to compromise at that point since they probably already passed the inspection period and have also lost a few weeks of time before the appraisal report has come in. They’re just a week or two from closing and are more likely to be willing to compromise. It doesn’t always work, but it’s a legitimate tactic.”
Andrew King is a contributing editor to RISMedia.