Always be aware of Appraisal Short Fall Risks BEFORE you sign a contract

Tuesday, February 7, 2017, 2:38PM

By: Keith Gordon


Very rarely do sellers address the appraisal risks before they enter into a sales contract. They tend to notice and comment on whether Zillow’s “Zestimate” is either high or low but overlook the actual appraisal risks.  Appraisal shortfall is defined as the difference between a contract/sales price and the appraised value; a short-appraisal can be one of the most harmful issues a seller can face.

A short-appraisal can be caused by 3 factors:

  1. OVER-IMPROVED PROPERTY

We refer to certain properties as A+ or A++ because they are superior to other surrounding properties due to improvements such as: 

These “best house in the neighborhood” properties can be at risk of not appraising at the contracted sales price. 

  1. PRICING AGAINST CMA (COMPARABLE MARKET ANALYSIS) 

Issues can arise when comparable sales data is ignored.  Many sellers ignore what Realtors are saying about valuation during negotiations and move forward with a contract, hoping for the best. 

  1. OUT-OF-AREA APPRAISERS  

The new mortgage protection act that was passed, called Dodd-Frank, has made it increasingly common for lenders to hire appraisers from out-of-area in order to save on costs which can adversely affect the outcome of an appraisal due to lack of local experience.  Many factors can and often do result in valuation far below the maximum value, including an ignorance of upgrades and too much focus on median value. 

Overcoming an appraisal shortfall is possible.  Critical to this is hiring a competent agent who can negotiate a deal not based on others’ opinions of its value (appraiser) but of what its true value is (what a buyer will pay) by delivering a buyer who will pay the highest value.  Truthfully, if you’ve made desirable improvements to your property that the buyer wants, they can pay for the shortfall in appraisal themselves and close without an issue, assuming they have the cash to do so. In other words, if a bank will only loan on the appraised value, the buyer is willing to bring their own cash to the closing table.  Alternatively, the buyer can opt to purchase a lesser quality property, go to Lowes and make the improvements on their own.  A buyer that wants the improvements you’ve made must be willing to pay for them and agree to accept an appraisal shortfall prior to completing the sales contract.  

Occasionally a buyer or their agent may place an offer far above what a property is expected to appraise at.  They do so because they know the home will not appraise.  This relatively unscrupulous tactic is used in an attempt to get their offer accepted while gaining leverage over the seller if/when the appraisal comes in short.  The buyer’s agent hopes that once an appraisal comes in lower than the contract/sales price, that the seller will be forced to lower the price.  A good listing agent will anticipate this strategy and be ready for it before the buyer attempts this move. 

An agent who is a great negotiator and skilled at handling appraisal shortfalls is more valuable than an agent whose goal is to simply close as many deals as possible.  I, and the brokers who have trained under me, have a stellar reputation as pro negotiators.  Our focus is getting our sellers the highest net, whereas many agents focus on just closing deals; those agents tend to compromise too quickly in a deal to earn their commission.  My team is skilled at knowing how to deliver our client’s asking price and higher whenever possible.  I teach patience in negotiations which is why I am able to deliver a higher net for my clients.  Appraisal shortfalls are nothing new to me and I’m highly experienced with the strategies buyers and their agents attempt.  I believe in proving value (list price) as opposed to making a counter offer.  I refuse to leave money on the table and the only real way to prove that never happens is to prove the list price is obtainable before assuming a counter.  

My team at ADDvantage Real Estate and Altru Realty have an excellent reputation in Florida.  Together we have sold over $840,000,000 in properties with an A+ rating at the BBB.

 


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