Predicting Appraisal Problems
Appraisal problems are one of the most common reasons a deal will fall apart. The good news is that we can almost always predict appraisal problems well in advance. The goal is to find potential appraisal problems and to make sure your clients are aware of the potential in advance of any offer.
Understand When an Appraisal is Not a Problem
The Market Area is Easy to Define
Most neighborhoods are easy to define. Modern neighborhoods like Circle C, Steiner Ranch, or Travisso are clearly defined by legal subdivisions, When this is the case, it's easy to define with comps will be included. Your appraiser is almost certain to look for comps within this easily definable market area.
Sold Comps are Plentiful
Appraisers prefer newer comps. They will priorities that sold within 3 months first, then 6 months, then 12 months. If comps are plentiful within 3 months, that's all they will use. If within 6 months, that's all they will use. If there aren't enough comps within the market area within the past 6 months, they will look back 12 months. Appraisers look for similar properties that are roughly +/-10 to 15% of the square footage of the subject propery, built around the same time, with roughly similar finish out.
There Are No Major Adjustments
Appraisers adjust the sold price based on specific attributes, but prefer not to. If the subject property or comps have major improvements like a pool or attributes like a view or greenbelt lot, then the appraiser will adjust based on these attributes. However, appraisers always prefer to compare like properties.
Sold Comps Exist That Support Price
After taking into account market area and similar sold comps, an easy appraisal will have sold comps that are at or above the contract price. If these exist, then it's highly likely your property will appraise at the contract price.
Oh no! This appraisal isn't staightforward. What should I do?
This is an edge Case. Ask for help!
Oftentimes, you can work through a potentiall difficult appraisal with another agent (or agents) and you discover that there's not a high likelihood of a problem. If you do discover that there's likely an appraisal problem, then you need to notify your clients.
- Let them know how likely the problem is. Is there a 50% chance it won't make value? 75%? 90%?
- Let them know what price you think it will likely appraise at.
- Inform them of the consequences if it doesn't hit value. They'll usually have to "make up the difference" in a down payment.
Many clients will still contract a property that has a high likelihood of an appraisal problem. In that case:
Prepare an Appraisal Package
Appraisers love to hear from agents (when agents are respectful.) When an appraisal isn't straightforward, it's your responsibility to put together an appraisal package that you can give to the appraiser to help them value the property appropriatly.
- Work with the listing agent (if you're the buyer's agent) to make sure you're notified of the appraisal before it's completed. (If you're the listing agent, do everything here.) You'll wan to change the showing instructions to "appointment with agent" and change the lockbox to "no lockbox" so that the appraiser contacts you prior to visiting the property. When he or she contacts you, let them know they can easily access the property (and arrange access) and let them know that you have some information for them you'd like to send over. Most (if not all) appraisers are happy to receive this information.
- Prepare a set of comps for the appraiser. These are generally the comps you used when you put together the offer for the property. Include an explanation as to why you used these comps and why you offered a higher amount (if this is the case.)
- Adjust any comps you've provided. Were any of the sales non-standard? Was a lower commission paid or were non-standard closing costs paid by the buyer (title policy, for example)? Make sure and note this on the comps you provide.
- Provide context to the appraiser. Were there multiple offers on the property and were the other offers close in price to yours? If so, the appraiser will want to know. In an appreciating market, this is often the case and it shows the appraiser that there is adequate demand at the contract price, which means the property is contracted at Fair Market Value.
- Resectfully present the package to the appraiser. A quick phone call introducing yourself is a fantastic idea. Email the package to the appraiser for their consideration.
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