Property Appraises Under Value? Do this...

Welcome back to the CA Realty Training blog, filling your head with knowledge on a weekly basis! This post is a technical one, and addresses one of the problems that agents sometimes run into.

Let’s say you’re putting together a deal and representing the buyers. The home is listed at $1 million, which means that the seller wants a million dollars for the house. Your buyer really wants the house, so they offer a million dollars and you think it will be a super easy, 30-45 day escrow period! You’re looking forward to closing the deal and you may even already have plans for your commission check…

As usual, though, the buyer is using a loan to purchase the property.

When there is a loan, there is a bank - acting as the lender. Since the lender wants to make sure their property (the home) is worth what they are lending, they send out an appraiser to give an unbiased opinion of value. Remember, that’s all the appraiser does in this process - review the house and comparables to provide a report of market value. They are not invested in the deal, so they don’t have any reason to say the property is worth more or less than market value.

Let’s say the appraiser comes out and, after doing the report, gives the opinion that the house is only worth $900,000. The appraiser has been hired by the lender, so the lender immediately knows that the value opinion of the home is below the sales price. And not by a few thousand - by a full 10%! Is your deal dead on arrival? Not necessarily!

Now, keep in mind that your commission will be around 2.5% - of the sales price, a million dollars. What’s that? The answer is: $25,000 - good money!! So your commission is on the line to be reduced or even completely taken away, if this deal does not go through at $1M.

You’re going to be stuck between two different parties. The buyer obviously doesn’t want to over-pay for the house, but the seller still wants $1M. They’re $100,000 apart - how are you going to reconcile this difference?

Well, if you listen to us and follow Rico’s advice, don’t despair and don’t fear. You have the skills to deal with this! Just have some self confidence and use your analytical thinking to come up with a solution that works for everyone.

Depending on the market, different scenarios will usually play out. In a hot seller’s market like there is right now, there is a very constricted amount of inventory and therefore buyers have very few choices for houses in any given price range. Thus, they may pay more than they were originally willing to pay. This also holds true for when there is a buyer’s market - usually the seller will settle on less than their asking price. The third option that usually works, is that both buyer and seller meet somewhere in the middle.

So, don’t be discouraged if your property appraises undervalue. There is always a solution. As William Shakespeare says: when there is a will, there's a way!