When it comes to appraisals, agents are facing a triple whammy: a shortage of appraisers, a lack of appraisers familiar with the market where the subject property is located, as well as appraisers not showing up until a day or two before the scheduled closing.
Moreover, when the appraisal does come in, it often fails to reflect the reality of what’s happening in that market.
What steps can you take to avoid receiving a low appraisal and if you receive one, what can you do to still get your deal closed?
Over the last few weeks, I have watched one of my dearest friends go through transaction hell. She easily sold her house in Florida but struggled to find the right property in Tennessee. After losing out on one property, she bid $20,000 over asking on a house where the sellers were willing to accept a VA offer.
The comparable sales supported the asking price of $350,000 as did the sales prices of the properties that were currently under contract.
My friend’s transaction was set to close in 30 days, but the appraiser didn’t show up until two days before the loan was supposed to fund. The actual appraisal came in three days after the scheduled closing date — at $310,000, a full $60,000 under what they had offered.
The same thing happened several months earlier on my brother’s purchase in Austin, Texas. The appraiser showed up 72 hours before closing and was contacting me (one of the buyers — I’m not licensed in Texas) to get into the property. Fortunately, we closed only a few days late.
Sadly, this is an ongoing issue everywhere. In an environment where the norm has been five million annual transactions, there are too few appraisers to handle the current pace of six million transactions a year.
How to avoid being ambushed by a low appraisal
The best way to avoid being ambushed by a low appraisal is to be proactive. Here’s what to do.
1. Advise the buyers about potential appraisal problems
When your buyers decide they want to engage in a bidding war, advise them about the various challenges they may face in terms of the appraisal. Warn them that the current comparable sales will probably result in the appraisal coming in at the old prices, not the current contract price.
Also explain that due to the shortage of appraisers, the appraiser may be from outside the area and appraise the property much lower than anyone anticipated.
You also need to ask: “Are you prepared to stay in the transaction if the appraisal comes in at close to the original asking price, not the extra $25,000 you are now planning on paying?”
Finally, and this is extremely important, ask your buyers if they can cover the increase in the purchase price and/or down payment if they decide to counter at a higher price or accept the seller’s counter offer at a higher price.
If the buyers are comfortable with all these requirements, continue. If not, advise them to withdraw from the negotiation.
2.Cut the appraiser off at the pass
If you are the listing agent and the property goes under contract, immediately remove the lockbox from the property. If you represent the buyers, ask the listing agent to remove the lockbox. This forces the appraiser to go through the listing agent to access the property for an appraisal and share an updated comparable sales package.
There are two major challenges with this approach, however.
First, removing the lockbox limits back-up showings while the contingencies are being negotiated.
Second, it can delay the appraisal even further. It’s a tough judgment call that the agents and principals must make based upon the risks and benefits entailed with each choice.
3.Make the appraiser’s job easier
If the listing or buyer’s agent is unable to meet the appraiser at the property, plan on leaving a package for the appraiser at the property labeled, “Most recent comparable sales for the property at (give the address).” Make sure it’s somewhere where the appraiser can’t miss it.
If the listing agent is unprepared to put this package together, the buyer’s agent can do it. Here’s what to include:
- In addition to your most recent list of comparable sales, provide interior photos of each property. If your MLS is not displaying them, Redfin seems to keep photos posted longer than the other portals.
- Also include any information you have about properties that are currently under contract. Contact the listing agents and ask if they’re willing to share the price their listing sold for. If they refuse, ask whether their listing sold over asking price and with how many offers. Include a price-per-foot analysis when possible.
- To give the appraiser a sense of the local market activity (especially those from outside the area), make a list of recently sold properties (closed or under contract) that have sold with multiple offers and over asking price.
- Two other resources to share with the appraiser are the property reports from NARRPR.com and HomeDisclosure.com. Both can save the appraiser considerable time and effort provided they’re willing to review it.
The bottom line is, the more data you give the appraiser, the less likely you will have problems.
4.Increased mortgage interest rates take hold
On March 23, NerdWallet reported that: “The average interest rate on a 30-year fixed-rate mortgage jumped 16 basis points to 4.779 percent APR. The average rate on a 15-year fixed-rate mortgage grew 15 basis points to 3.94 percent APR.”
Additional increases are planned in the near future. Couple this with soaring costs due to inflation plus continued price appreciation, and many buyers will find the house they can afford today will be out of reach tomorrow.
On the other hand, these same forces should start to decrease demand and eventually trigger price declines. The challenge is that the current situation is unique and no one really has a clear sense of what will happen next.
Should buyers walk away or stay in the deal?
Given these circumstances, should the buyers walk away or do their best to close the deal before the cost of homeownership jumps even more?
When it comes to this decision, always remember:It’s their house, it’s their mortgage, and it’s their decision. Give your clients the best information you can provide about where rates are trending, how it will impact their ability to sell or purchase, and then let them decide.
5.When the buyers decide to stay in the deal
A primary challenge when the appraisal comes in low is that you may have to find secondary financing. Here are the primary options:
- Ask the seller to carry a second for the difference between the current down payment and the loan amount.
- Credit unions or local business banks can sometimes bridge the gap, provided the buyer has an account (or is willing to open) an account with that lender, and is interested in obtaining a home improvement loan, or can provide another type of collateral.
- “Hard money loans” are a third source for bridging this gap. These are much more expensive than traditional financing and are usually provided by a third party that has nothing to do with the transaction.
- Get creative. One of my buyers had paid in full for their two-year-old car. When they needed extra cash to purchase their new home, they obtained a car loan to bridge the gap.
- In the past, I have also seen brokers and agents provide secondary financing by deferring their commissions in exchange for a note and deed secured against the property.
The challenge with all these approaches is whether the lender financing the first mortgage will agree to the secondary financing. You absolutely must disclose whatever you’re doing in writing as part of the transaction.
Challenges with upping the ante
If the buyer has 20 percent down, but is unable to increase their down payment to 20 percent of the new purchase price, they will have to also pay the following additional costs and fees:
- If they don’t have a full 20 percent down, they will have to obtain Private Mortgage Insurance (PMI.) which protects 10 percent of the lender’s 90 percent loan. PMI normally costs the buyer an extra quarter-point in terms of the financing.
- They will also have to pay impounds for taxes and insurance. The escrow or title company typically collects six months of these fees at closing, meaning the buyers have even less to put down.
- To avoid surprises, have your mortgage broker qualify the buyers at least 0.5 percent higher than the prevailing interest rates. This will cover the additional expense for PMI and impounds if need be.
Dealing with low appraisals takes skill and creativity. Do your best to make sure the appraisal comes in at the current purchase price and if not, be prepared to implement the strategies above to get the deal closed before rates climb any higher.