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How Appraisals Can Affect Your Sale
By Howard J. Willis *
Appraisals are an often misunderstood element in the purchase and sale process. Both sellers and buyers sometimes tend to underestimate how much lenders rely on appraisals to protect their interests in managing their risks. By considering how and when the appraisal process applies and the potential impact it may have on the final sale price, the savvy seller and buyer will know how to price their “product” and how to react when questions arise.
What is an Appraisal?
An appraisal is a professional appraiser's opinion of a property or asset’s value. The preparation of an appraisal involves research into the local market and the knowledge, experience and judgment of the appraiser. The appraiser’s role is to provide an unbiased opinion about the value of a particular property. Investors and lending institutions rely on the appraiser in order to determine how much money one can invest or lend on the property. The actual appraisal is usually a written report consisting of a description of the property and the general area and a review of recent sales of comparable properties. The final result is a specific dollar price opinion of today’s value of the property.
When is an Appraisal Needed?
One key condition usually found in a buyer’s offer is that the buyer must apply for and obtain a loan commitment within a fixed number of days. If the buyer cannot do so for whatever the reason, the buyer can notify the seller, terminate the sale agreement and ask for the earnest money deposit back. When the buyer applied for a mortgage and loan, the lending official orders the appraisal and the buyer becomes responsible to pay for the report. The mortgage banker made the appraisal a requirement in obtaining the loan by the buyer, so the appraisal now becomes part of the lender’s criteria in approving or rejecting the loan request.
Case in Point * To illustrate the role of the appraisal in a typical Weston transaction, the following fictional scenario may serve as a case in point. Joe and Sarah Wallace entered into a contract to purchase a home listed for $585,000 from Jose and Maya Garcia. Prior to listing their home, the Garcia’s interviewed several Realtors and had long discussions about the asking price. They paid 325,000 four years ago for their home, they knew prices had really increased in Weston and they wanted to be sure they made as much as possible. Each Realtors CMA ranged from an average of $526,500 to $557,750. The sellers finally selected Anne, the Realtor who said she could sell the home at just about any price they wanted. The Garcias said they wanted to get at least $585,000 so that’s the price Anne used. After Anne listed the home some time later there were two offers that she presented to the sellers.
Joe and Sarah’s Realtor ran a CMA and told them that the home was overpriced and that it shouldn’t be worth more than about $550,000. The Wallace’s were concerned that their offer may not be accepted so they offered $560,000. Anne told the buyers that her sellers had countered at $580,000 and later the buyers accepted the $580,000. Joy Beth, the mortgage banker, was concerned that their application was for a 90% mortgage and in the Weston environment she knew that lenders had become more demanding and concerned about their risk in properties holding their value.
When the appraisal report came back to Joy Beth, the estimated value was $560,000. Jose and Maria were furious and said “so what, that’s just one guy’s opinion, we’re not lowering the price.” Anne explained to her sellers that that if the two parties could not agree on a price then the buyers could walk and they would continue marketing the home. The Garcia’s instructed Anne to tell the Wallace’s that they would just have to pay the difference of $20,000.
Meanwhile, Joy Beth discovered a memo in the lender’s conditional approval that she needed to have the appraiser go back and find at least one more comparable sale in the last 60 days to support the appraisal as it was about $10,000 over the highest comparable sale in the last six months. The loan’s underwriter told Joy Beth that the lender was concerned about two things: the Wallace’s were only putting 10% down or $56,000 and that Weston prices had been increasing at such a rate that they had to be more conservative in case there was a cooling off in demand and prices.
When Joy Beth called the appraiser, he was dumbfounded, saying “there are no other comparable homes with the same number of bedrooms.” Later, the appraiser provided an acceptable comparable sale but now there were only two days remaining on the 30 day approval period in the contract. The Wallace’s were concerned that they had only $60,000 available to put on the down payment. The Garcia’s were upset at the thought of going back on the market and not knowing if they would face the same situation again.
The Realtors coordinated a series of conversations between the buyers and sellers who agreed to a new price of $565,000.
Real Estate: Risk and Reward
There are many variations on this depiction of how a purchase and sale can evolve. Each party is taking a risk in terms of actual cash paid and received, the quality and credit worthiness of the buyer, and the market’s tolerance of aggressive pricing. While there is a trend to limit or even eliminate appraisals in the purchase conditions, the fact remains that there are a limited number of buyers who are all cash buyers. Likewise, there are few buyers who can meet the loan down payment plus later potentially face paying more in case the appraised value comes in below the asking price. The informed seller can limit the potential risks of aggressive pricing by staying within a reasonable margin of the highest comparable sales. The informed buyer is prepared for the limited leverage in a seller’s market and knows there is a risk in losing a desired home if there are other buyers who have the cash to complete a sale.
* Fictitious names used in a combination of actual events
*Howard Willis is a realtor with Esslinger-Wooten-Maxwell Realtors and a principal of the Allegra & Howard Willis Real Estate Group. Howard has a law degree and specializes in providing real estate sales and services to premium home and condominium owners. Call with your questions and comments to (954) 949-0444 or to howard@thewillisgroup.com. Learn more about Allegra and Howard at www.thewillisgroup.com
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