Showings begin at 10 a.m.
By 5 p.m., you have 12 offers — 4 with escalation clauses — and another 10 buyer’s agents are trying to get you to wait one more day so they can bring you an offer tomorrow.
By 7:00 p.m., your $300,000 listing is now under contract at $319,000 with two backup offers and your seller is absolutely ecstatic! They have been calling their friends, bragging about the price, and thinking about all of the improvements they can make to the next house with the extra $19,000.
And while you are happy, you are also well aware that before $319,000 changes hands, it has to get past the appraisal — and the comps are pretty thin.
Valuing Property in an Accelerating Market
We have said it many times — using comparable sales to price (or appraise) property is like driving a car while looking in the rear view mirror. Knowing where you have been is important, but knowing where you are going is even more so.
There is no more frustrating event for agents and their sellers than having the appraisal come in below the sales price, especially when offers have already come in. When an appraisal comes in below the contract price, it unleashes a host of negative outcomes that can vary from annoying (increased payments, a larger down payments) to far more destructive (reducing your sales price to the appraised amount or buyers no longer qualifying).
Missed appraisals are huge issue right now in our industry and as long as values are rising, they will continue to be problematic.
The Appraisal is Fundamentally Flawed
The logic of the appraisal goes like this: If Property A sold for $X and Properties B and C sold for $Y and $Y respectively, then the subject property must be worth some average of the three. If pricing was static, then this logic would make sense.
But pricing is not static and if a home can only be worth some average of the comparable sales, how can pricing ever actually go up? Using the ‘If A, then B’ logic, no home can appraise for more than a previous sale.
Luckily, the appraiser is allowed to make adjustments for market conditions. In most cases, the adjustment for market conditions is what allows the appraiser to add value over and above the average of the three sales.
And as you would imagine, the adjustment appraisers make for ‘market conditions’ are extremely inconsistent and wholly subjective.
The Dodd-Frank Financial Reform Act, put in place after the Financial Crisis of 2008, was intended to prevent the next financial crisis from occurring.
One of the things Dodd Frank did was place a wall between the various service providers in a real estate transaction. The thinking was that by creating more separation between lenders, appraisers, and Realtors, professional objectivity would increase and the likelihood of fraud occurring would decrease.
Yeah… not really what happened.
What happened was that banks began to choose appraisers at random from a pool (instead of by their expertise in a specific area) and Realtors were largely verboten from speaking directly with the appraisers. The net result has been less accurate appraisals and no realistic platform from which a poor valuation can be challenged.
For agents, as well as the buying and selling public who already struggle to understand the excessively complex mortgage process, how can a house with 3 competing contracts — with escalator clauses — appraise below the contract price? If three people (or more) are willing to pay a specific price for a home, how can the value be anything less than the contract price?
What to Do?
In some cases, there is nothing you can do.
Some appraisers refuse to engage in any form of debate about values, even when they have made errors (and you would be stunned at the number of errors on appraisals). We have seen numerous times where an appraiser corrected the error, but didn’t modify the appraised value. Go figure.
If your appraiser won’t engage, the only options are to petition the lender to call for another appraisal (which sometimes you can convince them to do) or you can migrate the loan to another lender. Just know that loan migration is expensive, time consuming, and will likely delay settlement.
But sometimes, when you are lucky enough to have a true professional who is willing to listen to your case, you stand a chance for them to make the adjustment.
Sometimes correcting an honest error on the appraisal (such as square footage or some other feature) can make the difference. Tax records are notoriously inaccurate and when used to populate an appraisal, the bad data can skew the results. When you have an appraisal that missed, the first step is to fact check the data with a fine-toothed comb.
Other times, a similar home may be under contract that will be the perfect comparable, but you will have to wait for it to settle to be used officially as one of the comparable sales. If you don’t have the luxury of waiting, sometimes appraisers will be willing to use this information, despite the fact it has not closed.
And when all else fails, you have to challenge the market conditions adjustment by demonstrating the strength of the demand, the lack of inventory and speed at which the home was absorbed. Appraisers would not otherwise know you got multiple offers unless you make them aware. Don’t be afraid to do so as it is an important indicator of value.
Again, there is no guarantee, but if the agent is prepared, objective, and logical, then sometimes a missed appraisal can be mitigated.
The ‘missed appraisal’ is not going away.
Looking backwards in an accelerating market means a lag before values catch up and those on the leading edge of pricing are the ones who pay.
In order to be not just a marketer of property, but a true advocate for your client, the seller’s agent needs to be keenly aware of the likelihood of a missed appraisal and the techniques available to help lower their client’s risk. Furthermore, when the appraisal does come back low, being able to respectfully debate the valuation with the appraiser and lender is key to minimizing the impact.
In this day and age, getting top dollar for a home requires not only securing a price in excess of comparable sales, but making the price stick. Getting a good price is easy, but getting the home to appraise is when the pro earns their money.