Tuesday, September 24, 2013

Appraisal Nightmares and Seller Horrors!

By now you all know that the Atlanta Real Estate Market is in full recovery.  Prices are shooting up in many neighborhoods (gotta love it), but with escalating prices, come some new challenges- the dreaded "failed appraisal".
In our Georgia Association of Realtors purchase agreements, we have a form that we attach to the purchase agreement if the Buyer is making the purchase contingent upon their ability to get financing for the property.  This document has an appraisal contingency as well.  This document (an Exhibit to the contract) gives the Buyer an out of the contract if he  a) gets turned down for financing within the allotted time of the financing contingency or b) the appraisal is lower than the agreed upon price.
These contingencies have time limits that are negotiated between Buyer and Seller upfront as part of the negotiations.  Most of the time, the time limits for the appraisal to be completed is around 21 days from the Binding Agreement (Acceptance) Date.  The appraisal is ordered by the Buyer's mortgage lender.  If there is a 21 day appraisal contingency in a purchase agreement, it means that the appraisal must be completed and back to the lender within 21 days or less. 
If the appraised value is less than the Buyer and Seller negotiated upfront, the Buyer can send a copy of the appraisal to the Seller and request that the Seller lower the purchase price to meet the low appraisal ("failed appraisal").  The Seller can then either lower the price and move forward with the deal or refuse to lower the price, or the Buyer and Seller may agree that the price may be lowered some, but not as low as the "failed appraisal" value.  This would mean that the Buyer's loan is based on the appraised price and the Buyer will have to pay out of pocket anything over the appraised value. If the Buyer is unwilling to pay over the low appraised value and the Seller is unwilling to reduce the purchase price to the low appraised value, the Buyer may void the Agreement and get a refund of Earnest Money.  The seller is then screwed. 
As you can imagine, this scenario can be a nightmare for Sellers!  I've heard of many cases this year that homes sell over the asking price with multiple offers and the appraisal comes back lower than the agreed upon price, but the Buyer will pay the difference because they want the house.  This could be a smart move for a Buyer in today's market as inventory is very low and prices and interest rates continue to rise.  
I had three deals so far this year that the appraisal came back low.  The first, I represented the Buyer and the appraisal came back at $275,000 against the agreed upon price of $305,000.  The Buyer agreed to challenge the appraisal with the bank, but the bank would not budge on their acceptance of the low appraisal even though the appraisal said the house had 4 bedrooms when it really had 5!  In this case, we were able to get the Seller to come down to the lower price and my Buyer client was very happy!
The second incidence I represented a Buyer in a multiple offer bid and the price went $1000 over the $600,000 asking price.  The Buyer was putting down a ton of money so they opted not to have an appraisal contingency to make their offer more competitive than the competing bid.  The appraisal came back at $570,000.  The Buyer was ok with it as they were putting down over $200,000 anyway, but the lender challenged the appraisal as the appraiser also made mistakes.
In the third incidence,  I was the listing agent for a townhome priced at $169,900 and negotiated a full price contract.  The appraisal came back at $150,000.  The appraiser's data was inaccurate as he used a foreclosure comp and skipped better comparables that were not distressed sales.  We challenged the appraisal, but the appraiser would not change his appraisal.  The solution was to encourage the Buyer to re-apply for their mortgage with a more reputable lender and the Seller agreed to pay for a new appraisal to save the Buyer from two appraisal fees.  This appraisal came back OVER the purchase price at $171,000.  SWEET!  If we had not worked out a solution, the Buyer would have lost a great property and/or the Seller would have lost $20,000 in equity.
This just goes to show you appraisals are opinions of value.  And just like assholes, every appraiser has one.  You need a good Realtor to guide you through this process. 
Jackson Bass, ABR, Associate Broker
Keller Williams Realty of Buckhead

1 comment:

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