How to Close the Gap Between a High Contract Price and a Low Appraisal

When supply is low and demand is high, contract prices can increase rapidly.

This is commonly referred to as a sellers market.

Many times, in a sellers market, homes have to be sold twice:

  1. To the buyer
  2. To the buyer's lender (through their appraisal system). 

Often the second sale is more difficult than the first.

If the buyer needs a loan to complete the purchase, then the second sale can derail the first sale if the lender determines the contract value is too far above the current market value.

In addition, many neighborhoods have a high number of "fix-and-flip" properties where the original sales price (before improvements) is much less than the improved price.

When prices are surging, it is difficult for appraisers to find comparable sales to justify the contract price when performing the appraisal.

R.A.R.E. Agents know that the appraisal process can make or break a deal and always attend the appraisal.  

There is a fine line between influencing the appraisal (illegal) and providing information to support the contract price (perfectly legal).

I always put together a packet for the appraiser and personally deliver it on appraisal day.  The packet is professionally assembled in a presentation folder.  It includes:

  1. My list of comparable sales (printed from the MLS) that support the contract price. These are actual, closed sales that qualify to be used as comparables.
  2. A list of recent upgrades and improvements the homeowner did to the property.  The list should include what was done, the month and year, and the dollar amount invested.  (Example: Installed Quartz Countertops in Kitchen, July 2019, $7,500).
  3.  My business card.

The most important part is what you say when you hand the packet to the appraiser.

  • DO NOT SAY THIS: "I'm not sure how many appraisals you have done around here so I ran the comps for you.  Here you go."
  • INSTEAD SAY THIS: "I prepared a couple of documents for you as you are working on the appraisal.  The first is a list of recent sales from the area that we shared with the buyer's agent while we were negotiating to support the contract price.  The second is a list of recent upgrades and improvements the seller completed on the property."

I'll admit, delivering this information to the appraiser requires a fair amount of tact and skill, but after you do it a few times, it will become easier.

Don't chicken out!  This is how you represent your seller and earn your commission.

THE BOTTOM LINE:

Rather than fearing appraisal day (as so many agents do), take control of the opportunity to represent your seller in the best possible way by attending the appraisal and providing information to support the purchase contract you negotiated for them.

That's what Really Awesome Real Estate Agents do.

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