How Agents Should Respond To An Appraisal Below Purchase Price

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It really helps my perspective in a lot of ways to be both a Realtor and a loan officer. Just the other day, I had a loan only client where they were already under contract to buy a property when they contacted me. The basics of the situation was that the property was in a very urban area, built up about the time of World War I, that has seen considerable renewal in the last decade or so. I work there as an agent sometimes, but don't keep constantly informed on all the market activity in the area, so when I do get a buyer or seller client in that area, it does take me a bit of effort to get back up to speed on that micro-market.

Silly me, I trusted that the buyer's agent had done their job, and when I got the loan application, I sent the appraiser out. Yes, a stupid mistake, I know. The buyer's agent was raving about what a fantastic deal it was the whole time the appraiser was working. Then the appraiser e-mails me and said, "Value isn't there. Do you want to proceed?"

Well, beat me like a red-headed step child. I ran the comps, and there just wasn't any doubt. The property was at least 25% over-priced, at least as compared to what the appraisal will support. Keep in mind that lenders will only lend based upon the lower of purchase price or appraisal. This is good basic accounting practice going all the way back to Luca Pacioli, and those who would change this do not understand the underpinnings of our financial system nor do they understand loan underwriting.

So what do I do? First, I apologize to the client for not having run the comps in the first place. Then I explain the situation to him. Having the value fail to come in isn't the end of the world. He has a loan contingency in effect, so he has options.

First, he can just walk away. The loan can't be done on the terms of the purchase contract, giving him grounds to exit the contract without penalty. No harm, no foul. This is a good option to consider, especially if option 3 fails where it is usually the only viable remaining option that does not actively work against client interest.

Second, he can come up with the difference in cash or the equivalent, increasing his down payment so that all the lender has at stake is the same percentage of the appraisal amount. If it was an eighty percent loan on (for example) $200,000 (or $160,000), coming up with more cash can make it a eighty percent loan on $160,000 ($128,000), or higher percentage value loan on the same amount. This usually isn't a good option, but if the property really is worth that much to you, it might be worth considering if you can. Most residential buyers don't have this much extra cash lying around, but if you really would get something out of the deal that really is worth the money you are paying, it is an option worth considering.

The third and usually the best option is to renegotiate the deal. The seller can't make the buyer stay in the contract if there's a loan contingency in effect. In fact, if the appraisal is done correctly, there just isn't a lot of wiggle room for the sellers. Another appraiser is going to come up with a very similar value. Therefore, the seller is not going to get more money out of the deal. They can decide they want to do what is necessary for this deal, or they can flail about for months hoping for another buyer who doesn't need a loan. If the appraisal is done correctly, it is in the seller's interest to renegotiate. Some won't, sitting in Denial, but it's not the constructive alternative. If the appraisal is only going to come in for $160,000, pretending it's a $200,000 property doesn't help the seller any more than over-pricing the property in any other context. Remember, lower of purchase price or appraised value. If the appraisal is only for $160,000, the loan can't be based on a value higher than $160,000. Whether the listing agent bought the listing or whether there really are aspects of the property unquantifiable in the appraisal, the fact of the matter is that most potential buyers need a loan and are therefore going to be stuck with that appraised value, and can't pay more than it indicates. Even the ones who can usually don't want to.

There really aren't any other options that do not actively work against the interest of the buyer. The seller wants it sold and it is in their interests to get it sold. Most business models of real estate are built around listings and catering to sellers. They do not consider the interests of buyers, which is why the traditional response of most agents has been to play games and commit fraud and conspire against the interests of the buyer rather than do the hard work their job requires. It's also a reason why you want a good buyer's agent if you are a buyer.

This isn't to say that appraisers are infallible, don't make mistakes, don't collude with buyers upon occasion, etcetera. Sellers and their agents need to do their own due diligence to find out if that appraisal is accurate or not. But if it is, sitting there in denial of the facts isn't going to help.

What is not a constructive option is to beat up the appraiser or get another one. Assuming the appraisal is well done, the value is going to be close to what any other honest appraisal will come up with. The sales in the neighborhood are what they are. If there are better and higher comps, by all means ask the appraiser to take them into account. But if there aren't better and higher comps, it is neither in the buyer's interest nor the lender's to over-pay for the property. Buyer's agents and loan officers who pressure an appraiser for higher values than are justified, and appraisers who cooperate, are committing FRAUD. I have nothing but contempt for any of them. Especially the buyer's agents, who are violating fiduciary duty on the most basic level.

The appropriate response, on an buyer's agent part, is to renegotiate or advise a client to walk away if the seller won't renegotiate. That's doing your job, serving your client, etcetera. If I can't find comps that persuade the appraiser to change the appraisal upwards, that appraiser has just saved my client a large amount of money they shouldn't have been spending. The appropriate reaction is gratitude, not anger that my deal is falling apart and I'm not going to get a commission check yet. Unfortunately, this is often not the reaction that appraisers and loan officers get in that situation. The most common reaction is trying to find a more compliant appraiser, one who is willing to stretch the truth, and pressuring the client to fire the loan officer who just proved they will guard the client interest more than the lazy alleged buyer's agent. Exactly how is that fiduciary duty to pursue a path which results in my client over-paying for the property?

If the property really is worth paying that much money, I shouldn't have any problem explaining to my client why it is worth that much money, appraisal or no. Yes, they've got to come up with more cash, but if the property isn't worth the purchase price, I shouldn't be pursuing a course that results in my client paying that price. Agents who do should be fired. Actually, I think they should lose their license, but consumers firing them is an acceptable minimum.

It is only the loan which enables anyone to pretend otherwise. But a dollar my client pays for via a loan is every bit as much real money as a dollar out of their checking account. Neither a client or an agent should treat $1 in purchase price any different in an "all cash" purchase than they should if the property is bought with a 100% loan and no money out of the client's pocket. For an agent to do otherwise is a sign of the worst kind of crook in the business. If a property is worth $X, it's worth every penny of it whether or not lenders will lend based upon the full purchase price. It may not be a property which this client can purchase, but it is still worth that money. The appropriate response for a buyer's agent is to attempt to renegotiate, and advise walking away if that is unsuccessful. It is not to violate their fiduciary duty as well as committing FRAUD by getting a bogus appraisal. If the buyer's agent is really determined to do their job correctly, they've just got a little bit more to do than they previously thought.

Unfortunately, it's been a really long time since any of the main institutions of real estate were serious about the client interest part of professional standards. Neither the various Associations of Realtors nor anyone else really gives a rat's. What most of them teach is getting a transaction done, and treating the loan and the appraisal as obstacles to that, rather than protections for clients. There is an enormous inertia of lazy thinking in the real estate profession, and it's been hosing clients for decades. But just because you can manipulate the system to persuade a lender to believe that a property is worth lending $X on doesn't mean the property is worth that purchase price, and lenders are starting to defend their interests, something I'm very happy to see.

It isn't pleasant for a buyer's agent to re-open negotiations. It's still my job when this happens, and if the listing agent is any kind of professional, they're going to respect me for it. Nor is getting angry a constructive response from a listing agent. As a listing agent, I can try and find better comps, I can persuade the buyer why the property really is worth that much money despite the appraisal, or I can do what I almost certainly should have done in the first place: Go back to my selling client and explain why the property is over-priced and why they should sell it for less. A listing agent who can't or won't act appropriately in this situation isn't worth the dog feces stuck to the bottom of their shoe, much less a fat commission check. They are sabotaging their client, and should be treated accordingly.

This issue is endemic to Dual Agency, where the agent is supposed to be representing the best interests of both buyer and seller. What actually happens is they want to protect their double slice of an inflated pie by getting it sold at the inflated price, so dual agents are strongly motivated to pretend that the accurate appraisal is a lowball. As a buyer, the idea of protecting your interests generally doesn't even cross their mind in this situation.

Do you see what the common element is here, and the common problem? It's agents who didn't do their job right, whether they "bought" the listing by indicating an unrealistic price, or said it was a good bargain when it isn't. Not only did they commit one of those two egregious violations of client interest, when it is rubbed in their face, they are compounding that mistake by refusing to own up to it and deal with the consequences. It's difficult to own up to mistakes, but it's also something a professional has to do. Agents who refuse to do so should find themselves unemployed and penniless. It's too bad that by the time a consumer has discovered this issue, they are already damaged by these malfeasant twits. Unfortunately, it's very hard to get rid of these sort of agents and the inducements really aren't there for other agents who do serve their clients best interest to make the complaints that would, in a perfect world, result in the incompetent ones losing their license. All the more reason why consumers need to do due diligence in the first place and ask the agent the hard questions before they sign on the dotted line.

The guy I talked about at the start of the article? Despite the evidence I furnished of the comparable sales, his agent is either sitting in Denial or FRAUD. There isn't a lot of wiggle room here. They dropped the application with me when I took the position that the appraiser was correct. They couldn't dispute the reasoning, so they went in search of someone who will agree with them despite the evidence. The property still shows as being in escrow. The only way that value is going to come in for a value that allows that transaction to close as written is via a fraudulent appraisal that's going to result in the client paying too much for the property. But evidently, this agent has decided that's where his interests lie. So it does happen. It will happen to you if you're not careful about your choice of agent. The good news is that with lenders defending their interests more strongly now, this kind of agent is going to find themselves increasingly out in the cold when it comes to actually getting the transaction done. And about the only good thing about the new appraisal standards is that they have made that kind of "appraisal shopping" more difficult (Not impossible, but a little more difficult).

Caveat Emptor

Original article here


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About this Entry

This page contains a single entry by Dan Melson published on March 3, 2020 7:00 AM.

Buyer's Markets was the previous entry in this blog.

Loan Providers Offering to Pay For The Appraisal is the next entry in this blog.

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