Low Appraisals - New Process Impacts Contracts
One of the worst feelings a Realtor, buyer or seller can feel during the process of moving towards closing is a low appraisal. It's like a punch in the gut and steals your breath.
Appraisal Process Changing Jan. 26th!
There's also been a lot of buzz about the new appraisal system, going live January 26th this year which I'm sure most Realtors know about by now. Fannie's proprietary software system provided to lenders may prove to really throw a monkey wrench in the works for Realtors, but also buyers and sellers.
Sometimes we look back to look ahead and try and determine changes in trends. See the chart below provided by the Ohio Association of Realtors demonstrating how much difficulty agents have had with contracts over appraisals, but may be different in your area. Notice over half the deals had issues ranging from contracts being canceled, delayed or renegotiated? Painful enough, right?
Low Appraisals? What can Realtors Do?
First of all, this is happening as Fannie Mae wants lenders' decision-making processes to be informed, citing inflated appraisals have contributed to housing bubbles in the past, hence the use of their new system. Now, anything algorithmic is inherently going to have flaws, just like Zillow's "Zestimates". I get that excessive valuations create risk of future losses for lenders, as with borrowers defaulting and sending homes into foreclosure.
Before you decide how to combat a negative appraisal, first get some perspective. As a seller, let's say you place your home on the market for $300,000 and I bring your listing agent a buyer that finds the asking price acceptable. The appraiser shows up, gives a favorable appraisal and agrees the property is inline with the asking price. Good to go right?
Not anymore. Now the software program will run it's own "comps" which are going to be about as ridiculous as "Zestimates" and a system designed to help the process will in all likely-hood make it more painful and come back with lower numbers. Not saying that sometimes the results won't be inline, but most likely to present problems for a large percentage of contracts.
On a plus note for Zillow though, little by little they are increasing their accuracy as more entities provide MLS feeds. MLS is the most accurate database, and most reputable brokerage sites are MLS powered, like this one.
Let's say Fannie Mae's system comes back with comp averages of $275,000, now the $25,000 difference must be justified or the contract must be renegotiated and some contracts will just get cancelled. Where the headache comes in (besides not having a successful contract) is working with an appraiser to justify the asking price. Really, it's you, the Realtor, who will be justifying it and hopefully you'll make a successful pitch to the appraiser.
- Federal law prohibits coercion, bribery and other similar actions designed to persuade appraisers to base property values on factors other than an appraiser's independent judgment.
- The law, however, does not prohibit Realtors from providing factual information to an appraiser or answering an appraiser's questions regarding the property or the market. Information may include a survey of the property, the Residential Property Disclosure Form, eco-friendly or "green" features of the property, neighborhood information and recent comps.
- The more detailed and the earlier information is provided ensures a smoother appraisal process. Information can be provided through the MLS or directly to the appraiser at the time of inspection. Realtors will do well to make every effort to promptly and completely respond to any appraiser follow-up calls.
This also speaks to taking listings against your better judgement as a Realtor if the seller will not proactively listen to your advice on pricing. Price to high, not only will the home not sell, but should the seller gain a contract, it's crap shoot with unfavorable odds the deal will close due to appraisal factors.
Realtor Tips - Appeal & Work the Comps!
You may want to read my article "What's my Home Worth - Seller and Realtor Tips" for arguing points, but I'll give you an example how to go to bat for your seller clients. My business partner and I bought a duplex in Monroe, and the appraiser used comps of other duplexes that were not within close proximity of the one we were buying and they were also located in very distressed areas. This in turn brought the appraised value down to an unacceptable price and jeopardized the completion of the transaction.
The appraisal had come $15,000 too low, and the appraiser was not from the area had actually run comps in Middletown, a next-door community due to not finding comparable sales in Monroe. Flabbergasting, I believe he just "winged it" for convenience sake. Awful, right?
Marty is a very knowledgeable Realtor and knows his stuff! He filed an appeal of the appraisal, ran his own comps, submitted them along with the appeal of the appraisal. Behold, the appraised value was increased by nearly $20,000. Part of that success was due to successfully arguing differences in construction and cul-de-sac location.
Realtor Tips - Be Mindful About Time
Part of caring for clients, I believe, is being sensitive to people's time frames and needs. If a seller has to sell, and sell soon, explaining the sometimes egregious draw of time from complications like these may throw their plans awry. At a listing appointment, considering talking about appraisals and how you'll argue for your client. These are great talking points beyond marketing and charms. Some sellers have inflexible time constraints, for whatever reason. Appraisal, asking price, lender and buyer all have to agree or look for another home; a consideration for the seller, and for Realtors that want to succeed in meeting their client's goals.
And some people still want to go the FSBO route?