What happens in a real estate transaction when a home
under-appraises?

In this episode of Market Mechanics 101 I’m going to give you the
blow by blow recount of a sale gone right…..and appraisal gone wrong….
and I want your opinion. Should this be? If not, how do you think it
should it play out?

Here’s the situation:

I take a call from an extremely nice couple wanting a price estimate
on their home explaining that they want to sell, and need the opinion
from 3 agents on what they feel their home will sell for. Perfect! Right
up my alley. We discuss the particulars and set up a meeting.

I go to work pulling comparable properties from the neighborhood
looking for similar homes sold in the last year. I find 8 which is plenty.
I proceed to make common sense allowances for the differences
between the comparable properties and the subject home to come up
with a composite snapshot of the market to help predict what the home
should sell for. Additionally, I calculate the range, the average number
of days it takes to get an offer, and the biggest “bite” any buyer has
taken off the list price in negotiation, so we have a solid idea what the
margin for error is. The estimates at this point all indicate a very narrow
range of potential prices with a small margin of error. Solid on the math,
I call the homeowner to confirm the appointment and head out to the house.

We hit it off from the start, and everything looks good. The house is
exactly as expected and other than a bit of light TLC there’s not much
required to get it on the market. I’m the third agent of 3 to come out,
and after sitting down, it seems that the other agents have all shot high
on value. Not wanting to set my prospective clients up for failure, I go
through the figures explaining each part until we’re all on the same page.
They agree that the other agents are off in space and that my estimates
are the most realistic. They decide they want to think it over, and get
back to me. Knowing my numbers indicate that they are in a much tighter
situation than they thought, I don’t want to push a delicate situation so
I agree to follow up in a few days.

I make the call and results are in. I'm hired. GAME ON! The sellers
tell me that although my numbers are not what they hoped, they felt I
was the only one to do my homework, and present the truth. We meet
for a staging consultation and get to work prepping the house.

Fast forward to staging and photo day. I bring out my bedroom in a box
kits and deck the house out for photos. They come out fantastic and the
house is ready to go live. Lights, camera, action!

Even though we’re showing through the holidays, we get great showing
activity, and start to get interest. Feedback indicates price and condition
are on point. Interest eventually turns to offers, and (after some wrangling)
we make a deal. We get full price, but have to pay out some settlement
assistance. As we were working with a known margin of error, paying out
some settlement assistance still put us reasonably close to the target net.
So far, so good.

Enter the appraiser…..

Things started out as they always do. A call to schedule access. Some
brief interaction with the seller, measurements, photos, and hes’ out the door.
24 hours later, I get a call from the buyer agent saying we have a problem
because the appraisal came in $2000 short of the mark.

Here we go….

Now in and of itself, that’s not unheard of. BUT, normally we know
when a property could potentially come up short on value. It’s either
over-priced from the beginning, we raise the price to build in seller
assistance, there’s a bidding war and the price gets run up over the
market, there aren’t any comparables, it’s a unique property….etc.

There are a handful of predictable things that cause a home to under
appraise and very clear expectations are set with the sellers. Bottom line…
it’s rarely a surprise. The strange thing is that in this situation, there were
no indicators of a potential problem.

There were however, some red flags that began to pop up as soon as the
appraisal was scheduled:

1. The appraiser was someone we’d never heard of.
2. The appraisal only took 24 hours when they normally take 3-5 days.
3. The appraiser was from way out of town.
4. The report indicated that the market was “balanced” when in fact all
data indicates it favors sellers.
5. The report indicated that the prices were “stable” when in fact all data
indicates they are rising.
6. The “average” of the adjusted values came in almost $5k ABOVE the
sales price.
7. The “appraisal” value came in almost $7k below the average of adjusted
values.
8. The appraiser expressed that 2 of the comps were more heavily
weighed than others. (strange because there’s nothing special about
these two sales, and in a town-home community the properties are
fairly similar)

So now we have a situation where the buyers and sellers are understandably
concerned. One might think the buyers would be happy about this because it
represents an opportunity to get the price reduced. But they’re not. They
worked very hard to find a compromise on price in a situation where the
sellers had a very small equity margin to work with. They’re worried it will all
fall apart. The sellers are concerned because this appraisal is for the FHA
and so will stay on file to be used for any FHA contract on this house. Not
a good situation in a price range where most buyers are using FHA.
The sellers are effectively stuck. The agents are scrambling trying to keep
things together.

Although this $2k discrepancy represents a significant chunk of the
sellers proceeds in an already tight situation, more to the point, it represents l
ess than 1% of the sales price. That’s right…less than ONE PERCENT. That’s a
pretty fine judgement call in a situation where the lowest adjusted value and
the highest adjusted value differ by more than $40k.

So I find myself wondering how, if prices are going up, and the average
adjusted value on the appraisal several thousand dollars higher than the sales
price, can the appraiser not figure out a way to come up with a value that
supports the sales price, when more than 50% of the data supports a sales price
even higher than what we have? That’s not a rhetorical question. I really do
want to know. How?

To make matters worse, when I asked the appraiser (exceedingly politely) if
he could spare a moment to walk me through the numbers so that I would be
able to better explain to my client what happened, he said “Oh…sure….but I have
to call you back”. And that was the last anyone heard from him. After 4 messages
there was never a return call. He got his $475 I guess. Case closed.

Fortunately there is a silver lining. The other agent is extremely good, and
his clients are wonderful people. My clients are as well. Both parties (equally
baffled by the situation) collaborated to split the difference and continue with
the sale. Gratitude and smiles all around. This is the best possible outcome
in a bad situation. So why am I still unhappy? Well….it all seems a bit arbitrary
and unjust. Worse still is that I learned nothing that would help me avoid this
in the future. It was, and apparently will remain, as inexplicable as bolt from
the blue.

Now I’m a VERY experienced agent with hundreds of sales to my credit, and
this was a very well prepared, reasonably priced listing, supported by all the
data. This kind of thing shouldn’t happen. Yet it does all the time without much
rhyme or reason. And given the fact that each appraiser seems to have a
different take on how to arrive at a value, and that there is very little agreement
between them, I don’t feel as though the situation is likely to improve anytime
soon.

So…my question is….

With nearly unlimited access to data, how can we still be having these sorts
of issues? Is it time for a change? If so….what should it be? Maybe a built in
allowable margin that says “if the appraisal comes in within X % of the sales
price it’s automatically deemed “good”?

As always, I welcome your thoughts!

Warmest regards,
Jason