Appraisals are becoming one of the most frustrating issues for both Sellers and the agents who represent them. Quite often, a price is agreed to by both buyers and sellers, a contract is written, and everybody seems to be happy until the appraisal is done. It is quite common for the appraisal to come in low and the buyer demands the price be renegotiated to reflect the low appraisal. Once this happens, it becomes very difficult for the agent to keep the contract together.
Low Appraisals should be addressed with both buyers and sellers prior to the appraisal being done. The approaches listed below should help:
Once the contract is written and accepted, explain to the buyers that it is not uncommon for appraisals to come in low. Let them know that because of the:
– Economic meltdown
– Previous overpricing issues with real estate
– The dramatic meltdown in prices
Most appraisers are very concerned about keeping their jobs, so they are almost always ultraconservative with pricing.
Typically, an appraiser is paid $40,000-$50,000 per year, they lose nothing by undervaluing property, but are afraid of losing their jobs if they overvalue property. It’s a typical example of an “over-correction” because of inflated appraisals that occurred in the past. For the typical appraiser, because of this concern, it makes sense for an appraiser to come up with a very conservative number.
If prices have stabilized in your market, still remind the buyer that prices have dropped for several consecutive years so they should appreciate the appraiser’s extreme caution. You must also show the buyer recent history which tends to prove we have price stabilization.
Also, discuss recaptured depreciation and replacement costs to prove to the buyer there is minimal risk of long term loss.
Remind the buyer of what has recently happened with the recovery of Stock Market values.
Show the Buyer that any potential loss is merely a short term or “Paper Loss” because they’re not planning to sell for a number of years anyway.
Finally, discuss any of the 4 key indicator’s that point to a recovery. They include; Supply, Demand, Months Supply and Value or Price Per Square Foot.
Congratulate the Seller after the contract is approved, but remind them that we’re not quite there, yet. We still have one hurdle to clear. It’s the Appraisal. Don’t be afraid to address this issue in advance, even if the Seller is resistant. It gives them time to get used to the idea that they may have to renegotiate one more time.
Explain that one of the key concerns for an appraiser is the downward price trend that has occurred for several years.
Remind the Seller the delicate condition that still exists with the economy and serious issues we are still facing, such as the devaluation of the dollar, deficit spending, the completion of QE2, stimulus spending in June, and how all of these things could continue to adversely impact pricing.
Remind the Seller of the emotional benefits of selling and what it means to them to have the sale behind them.
Express your concern about Shadow Inventory and Foreclosures.
Keep the Seller informed of any recent sales or new listings that are introduced after the sale is completed.
Tell the Seller that as their “Advisor”, it is your responsibility to pro-actively identify any potential issues, and possible solutions.
By discussing the Appraisal problem with the other agent and both parties before it becomes an issue, it is much easier to get both sides to compromise.