Appraisals in a Softening Market

December 31, 2005

Finally got a ratified contract. Maybe you offered closing cost assistance. Maybe you had to accept a lower offer to get the contract. Done? No. The buyer's lender will order that dreaded appraisal and everyone hopes it comes in equal to or higher than the negotiated price. Boom! Bad news. The appraisal is substantially lower than anyone expected. What happened? And, what can you do?

1. You can renegotiate the price and hope the buyer has some extra cash to make up any difference.
2. Bite the bullet and agree to the appraised value as the selling price. Just how desperate are you to sell?
3. Don't negotiate. Void the contract and start over (the buyer may have already done this.)
4. Challenge the appraisal. But, you have to back it up with comparables that the appraiser didn't consider. The buyer and seller have to be pretty motivated to get the deal done.

You probably got into this situation for a couple of primary reasons: your agent didn't get the comps right in the first place or you weren't being realistic (as in greedy) and thought you should get what your neighbors got 6 to 12 months ago regardless of what your agent presented. On the other hand, the appraiser flat out missed it (go back to #4 above). Sellers have to realize that markets change. Competition changes. Buyers wants and desires change.

There are a few ways to avoid this disappointing turn of events. Make sure your agent shows you the detail and the comps are recent and closely aligns with your neighborhood or at least the type of property within the general area. Next, since the local market started slowing a few months ago, we recommend spending the few hundred dollars to get a pre-listing appraisal. This becomes another data point for you and your agent to consider. Also, temper your expectation. You most likely have a generous tax free gain (called equity). It is still a GAIN (not a LOSS) even if the market is not as generous. The absolute worst behavior is to be unrealistic, set your price too high and sit on the market for weeks and months without even a showing or an offer.

There is another good article in the Washington Post this morning about "Appraising a Shifting Market."

Comment on Appraisals in a Softening Market. Follow this article is off. More articles like this one filed in: Buying & Selling Real Estate