Dear Ray,
I listed my house for sale and immediately received five offers. Several of the offers were over the asking price, and I chose the highest offer.
The buyer was pre-approved for a mortgage, so I expected a trouble-free sale. Everything was going smoothly until the appraisal. My Realtor informed me the appraised value was less than the sale price.
I was faced with the choice of paying for a second appraisal — with no guarantee the value would be higher — or reducing the sale price to match the value of the appraisal. I chose to reduce the sale price.
I’m very frustrated, and I wonder if other sellers are receiving low appraisals?
— C.S.
I share your frustration. You prepare for weeks (or months) to put your home on the market, painting and fixing and sprucing up the home. Your efforts are rewarded with multiple offers and a premium sale price. Then the appraiser determines your home is not worth the price you’ve negotiated with the buyer.
There’s a saying, “Misery loves company,” which may be appropriate in this instance. If it’s any consolation to you, a low appraisal is not uncommon.
After you received the low appraisal, you were offered two choices: Reduce your sale price or pay for a second appraisal. You had a third choice, which I’ll address later.
As we begin a new year, Seattle is one of the hottest real estate markets in the nation. In 2015, average homes prices increased approximately 8 percent, with some neighborhoods experiencing much higher appreciation.
For example, the median sale price downtown condos soared 35 percent, year-over-year, according to the Northwest Multiple Listing Service. A critically low supply of listings is contributing to the steep rise in real estate prices.
In an overheated real estate market, prices tend to rise more quickly than the actual market value. An appraiser is faced with the challenge of justifying the sale price of a property in a rising real estate market.
To arrive at a value for your home, the appraiser must choose from among comparable sales that are most similar to your home and sold in the previous 180 days. In a rapidly rising market, it’s not uncommon for prior home sales to be 1 to 5 percent less than your home.
It’s up to the appraiser to determine if the sale price you’ve negotiated is appropriate for the rising real estate market or if the sale price is the result of one or two overly enthusiastic buyers who’ve bid the price higher than the market value. It can be a very tough decision. It doesn’t help that the appraiser works on the lender’s behalf.
From the lender’s perspective, the goal of the appraisal is to determine the probable price a typical buyer would pay for the property. The fact is, the lender wants to approve your buyer’s loan. The bottom line: New home loans are major source of revenue for banks.
When the appraised value is below the agreed upon sale price, there are several issues to address. First, the buyer — who is emotionally involved in the purchase of your home — may react in a positive or negative way to the lower value. Some buyers see this as an opportunity to renegotiate a lower sale price. On the other hand, a buyer who is having second thoughts about your home might use the low appraisal as an excuse to cancel the sale.
Second, the lender is unlikely to approve the mortgage if the sale price is less than the appraised value. This forces the buyer or the seller to make concessions. The lender will want to see a lower sale price, a re-appraisal that justifies the current sale price or a larger down payment from the buyer (the third option).
You chose to reduce your sale price to match the appraised value. You could also have chosen to hold the line on price, which would have forced the buyer to make or a larger down payment to satisfy the lender. The risk is that the buyer might be unwilling or unable to make a larger down payment, and that would mean you’d lose the sale and your house would have go back-on-market.
As the seller, you have to decide if you will accept the low appraisal, pay for a second appraisal or take a hard line with the buyer and risk losing the sale. This is where you’ll appreciate the advice of an experienced Realtor.
‘Selling’ your home twice
Sellers should prepare for two things in the new year: soaring home prices and low appraisals.
Seattle is ranked fourth on the list of “Best Real Estate Housing Markets for 2016.” Home prices are forecast to rise 14.9 percent, according to housingpredictor.com. Sellers should prepare to sell their home twice in 2016: once to a buyer and a second time to the bank (through the bank’s appraisal).
In a hot market, where prices are soaring, it will be difficult for appraisers to find adequate comparable sales. You can give yourself an advantage in a volatile market by choosing a Realtor who has dealt with low appraisals before.
Tip: When interviewing agents, be sure to ask about their strategy for pricing your home, for dealing with multiple offers and how they’ll deal with a low appraisal.
(Note: Intentionally pricing a home too low to encourage a bidding war can backfire if the appraisal doesn’t support the price. Pricing your home correctly for the market is a better strategy.)
RAY AKERS is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to ray@akerscargill.com or call (206) 722-4444.