Some folks love a good surprise. Others, not so much. Take, for example, having a baby. There are some couples who want to learn the baby’s gender in advance, so they can plan, pick a name and gear up in the appropriate colors. Others are “not finder-outers”—and those people are crazy. I’m joking…no, these couples prefer to wait until the day of the birth to find out if they’re having a boy or a girl. SURPRISE!
And then there are people who like surprises in some areas but not others. My wife, for example, would not have had a happy birthday this year had I thrown her a surprise party. I was warned, and I listened. However…she does love presents, and if I offer her the chance to open a Christmas or birthday gift early, she often declines. She likes those surprises.
Here’s my point—there are areas of your life where you can control whether or not something comes as a surprise. But there are many aspects of life where you do not have control and a real estate transaction is one such endeavor. And within the real estate transaction, one hiccup that can catch both buyer and seller by surprise is the appraisal.
I have a theory as to why this is: in the majority of residential real estate purchases, the appraisal is not an issue. The buyer and seller agree on a price, the buyer’s lender orders the appraisal, and a few weeks later the report comes in, and the price is validated. Sometimes the listing agent and the seller don’t even know. In terms of impeding the transaction, it doesn’t even qualify as a speed bump. You cruise right over it.
When the Appraisal Goes South
And then there are transactions where the buyer pays cash—and in many of those cases there is no appraisal contingency. My point is, we are used to it not being an issue. [Note: I should point out, for my real estate agent friends reading this and getting ready to call/text/email me… a good realtor will always be watching and waiting for the appraisal contingency to be satisfied. But, even they would agree, that, in most cases, they aren’t overly concerned about it.]
On top of that, keep in mind that by the time the appraisal report is returned, the home inspection has been completed, any repairs have likely been negotiated, the buyers have signed their loan application a.k.a. the dust has effectively settled while all parties wait for the loan to be approved. Everyone involved has spent weeks emotionally investing in the fact that this deal is happening!
And then BAM! Seemingly out of nowhere comes the appraisal—and the value is low. The contract sales price is $200,000, and the appraised value is $190,000. Let me stop right here and say—I know most of the appraisers in town, and the majority are excellent at their job. They perform a necessary function in the transacting of real estate, and they all take that role very seriously. And none of them like to return an appraisal with a lower value. But they must adhere to the standards set before them.They must fulfill their obligation and do it properly.
All of these things are fresh in my mind because I very recently had a transaction where the purchaser—even though they were paying cash—opted to have an appraisal performed. And while the seller had agreed to take a healthy discount off the list price, the appraisal report reflected an even lower value. SURPRISE! Really, no one in the transaction—buyers, sellers, agents—saw it coming.
So what takeaways can I offer, in light of this and other recent experiences?
Here are a few:
If you’re a seller, really look at the sold comparable homes your agent presents when you get ready to list. If they do not support the value you want, just know that if you choose to list higher—and even if someone agrees to pay it—you still aren’t over the hurdle. In fact, you may have just raised it. The appraisal can scuttle your entire deal.
However, if you feel the value you placed on your home—and more importantly, the value upon which you and the purchaser agreed—is valid and the appraisal does not support it, be prepared to defend it. Or even take it a step further and be proactive—have your agent provide a list of recent improvements and sold comps to share with the appraiser in advance of the report being done.
And if you’re a buyer, don’t forget about this hurdle. If you’re emotionally ready for a surprise that never comes…that, in itself, can be a nice little surprise.
Have a question or an idea for a future article? Email me at firstname.lastname@example.org.
By Dan Vollmer