Common sense steps when the lender tells you that the appraisal value has come in short.
First: Don’t panic. The sellers and buyers will be looking to you to measure your reaction. They will want to know how serious the low value is. Your first job is to tell them that this happens a lot and most times we have enough information and tools to keep the transaction going to settlement.
Second: Check the facts. Both the listing agent and the buyer agent should obtain a copy of the appraisal and check to see if:
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The best comps were chosen
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The adjustments taken were accurate
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There were no hidden flaws in the comps that the appraiser may not have known about (fires, defects, missing elements)
Third: Ask the lender what the formal appeal process is to challenge the results of the appraisal
Fourth: You should try very hard to make sure that the buyers and sellers so not overreact to the low appraisal and begin negotiations before all the facts are known. Comments from the buyer like “ Well if the appraiser says its worth that amount then that’s all I am paying” or from the seller “well we are not coming down a penny” are not productive and should not be encouraged or repeated.
Fifth: Determine what the new value means to each party in real terms. For example If an appraisal is $5000 short of the contract price that means that the buyer’s closing costs will be less, their monthly payment will be about $22.00 less a month and they will own the house with about $5000 more equity if they bought the property at the lower price. Considering these advantages to the buyer it makes sense that the buyer should be willing to try to compensate the seller some amount to try to bridge the gap between contract price and appraisal price.
A seller likewise should consider that the asking price and contract price were based on their subjective idea of the value of their property. Sellers are typically very subjective about the value of their property. Sellers have to come to terms with :
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The value in the appraisal may be locked in for 6 months if this is an FHA or VA appraisal so they can’t go and find another buyer and try again.
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The appraiser is a professional and his objective valuation will most likely be the same outcome should another appraiser take on the same valuation assignment
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If they blow up this contract because of the appraisal it is most likely that another buyer will offer a less or similar value when compared to the appraisal price. With additional (DOM) days on the market and the information in the MLS that the property sold but the sale fell thru. The sellers will be trying to re-sell a shopworn listing.
Sixth: Make the deal after everyone has had a few days to think about the situation and not early on when all parties are simply reacting. If necessary walk the buyers back through the property so they can get back in toutch with the emotional feelings that caused them to purchase the property in the first place. If you represent the sellers remind them about their goal of selling this property and moving on to a new property. Explain that when a house does not appraise it is simply a time to readjust the transaction details. It does not have to be a terminal event.
Lawyers, agents and experienced real estate professionals have learned to manage the tensions of the parties involved and to work out new win-win terms that work for everyone. It’s not the price that a house sold for that matters in the end; it is the fact that the property sold and settled. Nobody ever called a Realtor up and said I want this house to sell for exactly $143,440.00. Sellers know that the marketplace has its own rules. Keep an eye on the goals. Buyers want to move into a house. Sellers want to move out. Agents want to make the transaction go as smoothly as possible. How you conduct yourself when the appraisal comes in short will define the outcome. Establish yourself as a consultant to help your clients make good decisions with their real estate transactions.
Tip: One of the best ways to manage a short appraisal is to keep telling buyers and sellers thru the transaction that we will try to work it out at this price but the appraiser may change it slightly. The important thing is that we have a buyer and a seller that want to complete the transaction. It is usually the shock that causes all the issues. If the parties are prepared for a short appraisal then it is a lot easier to hold the transaction together.