Of Agents And Appraisers: Avoid the White-Knuckle Listing

In most real estate contracts (including financing), the deal is contingent upon the property appraising for sales price or greater. This work is done by a real estate appraiser, who estimates the value of land and buildings. It also confirms for the lender that the transaction is fair and at arm’s length.

It’s a major contingency in the transaction. Yet oddly enough, the listing agent is not informed about the outcome of the appraisal unless the appraiser’s evaluation falls short of the contract price. That is when the listing agent gets a message along the lines of, “Houston, we have a problem.”

Good Listings Begin With Data

A good listing agent should never white-knuckle it, hoping the appraisal comes back “good.” A worthy listing agent should start with a data-based market analysis, which supports and defends the property’s list price.

Since the Great Recession, appraisers are chosen randomly (don’t get me started) by a third-party clearing house, not the lender. The appraiser might have zero experience with your listing’s general type and/or location. They might be flying blind.

What can you do?

A good listing agent will leave nothing to chance by MEETING THE APPRAISER AT THEIR LISTING. The listing agent can provide data and context by meeting the appraiser in person. Context is always important.

“These buyers from out of state took one look and made an offer that night. We had another offer coming in, but these buyers made it clear they wanted it. My seller didn’t want the stress of a bidding war.”

That’s context.

Always Meet the Appraiser

My associates always meet the appraiser (they’re required to). If they’ve done their job well, the exchange of info is a veritable no-brainer. If there’s even a chance that the deal might not appraise, then meeting the appraiser becomes an even more important part of doing their job well.

So, what happens when everything goes according to plan? AKA, it comes back OK? Well then the two parties happily move forward to closing.

But what happens when there’s a shortfall or a gap between the appraised value and the contract price? What happens next varies from state to state, market to market.

In my neck of the woods, the seller can adjust the contract price to equal the appraisal value and move forward to closing. If the seller declines to do that and the two parties cannot negotiate a new price, the buyer is then left with two options:

  1. Pay the delta between the appraised value and the contract price (in terms of an increased down payment).
  2. The buyer can walk and get a full return of earnest money because the financing contingency could not be satisfied.

What if the two parties both agree that the appraiser is a numbskull, and the appraised value is way off base? Can they share the cost of a new appraisal to keep the deal together? Nope.

A Revised Appraisal Isn’t Likely

You can ask the appraiser to revisit their report and provide more accurate data, but the appraiser receives no additional compensation for revising their work. I’ve only been doing this for 30-some-odd years (emphasis on odd . . .), but I’ve yet to see an appraiser say, “You got me, I screwed up. So, I’ll redo my report gratis to hold your deal together. “

Mind you, some of my closest and most respected colleagues in this business are appraisers. I exchange info and perspective with a handful of appraisal experts on at least a weekly basis. I often recommend that my sellers have a recent appraisal on hand as an extra arrow in their quiver.

But this is not about that handful of respected experts. This cautionary tale is about the randomly “selected” appraisers (selected by virtue of being the lowest bid for the job….) who sometimes get a little over their skis and plow into your deal.

Don’t Leave Your Deal to Chance

This is why, at the outset, it’s critical that your listing agent uses data-based pricing and then provides full context to the lender’s appraiser after the property goes under contract. Otherwise, your agent is leaving your deal to chance. Why gamble on an agent like that?

Better to rely on a listing agent who earns their keep every step of the way, even between contract and closing.

Originally posted on Forbes.com