How Home Sellers Can Limit Appraisal Issues

Atlanta home buyers and sellers know the chess game that the '20-'21 real estate market has been and continues to be. The shortage of housing inventory around the greater Atlanta market is well known; there's no cavalry on the horizon. Buyers are bruised and beaten, just about all having lost more than once during multiple offer situations. The idea of offers over list moved from "only if we need to" to "how much over". Sellers should be loving it, but there's one catch; appraisals. If the appraisal comes in low, that big seller payday may not materialize. Sellers have to nail that back door shut and keep buyers from playing games.

Under List? Surely You Jest

Let's all acknowledge that the greater Atlanta real estate market (2021) is about as strong a seller's market as there's ever been, We've covered the numbers, months of inventory and soaring prices - now let's look at average percent of last list price. Last list price is the price the home was when it contracted. We know that sellers will over list to see who's hungry; this accounts for and removes that. The four counties below are representative - and cover homes from under 100K to well into the millions. Scroll over this chart.

As 2021 opened, so did the idea of "better be over list". Sellers hear it, see it and expect it. Buyers know they have to be creative. Many will over pay just to end the brutality, others (and their agents) will get cute. Sellers (and their agents) need to be smarter.

We'll Waive the Appraisal

Appraisals rely on closed sales; looking back. Contracts are the present and looking ahead. The big challenge is the insane lack of closed sales. Another are the utterly nonsensical agent MLS descriptions; every home is "stunning", "breath taking" or "amazing". The molestation of the English language and puffery by agents contribute mightily to appraisal issues. If everything is "best ever", nothing is. The MLS is the main data source for appraisers, challenges are only exacerbated by misleading hyperbole. Appraisals are critical with every loan, super critical for FHA loans because a low appraisal runs with the home (FHA case number) for months.

Offering to "waive the appraisal" is meaningless unless a very specific stipulation clearly spells out what is meant by that. There are many ways to structure one but they must not be vague or subject to interpretation. Language specific to the appraisal is contained in the Loan Contingency exhibit and if the stipulation isn't clear, this language may hold. That says that in the event of a low appraisal, the buyer can seek to renegotiate with the seller and if unsuccessful, a loan declination letter from the lender can be used to terminate. 

Sellers may find it wise to get ahead of buyer games and close this appraisal loop hole altogether. Rather than have the buyer structure the stipulation,  the seller can. Doing that allows the seller to clearly state that a loan denial letter MAY NOT BE based upon an appraisal below contract. Now there's teeth to that "waive the appraisal" offer.

Finally, sellers ask for a pre-approval letter from buyers, why not ask for proof of funds to cover a possible appraisal gap? This can easily be written as a stipulation or requested during negotiation. In theory, the buyer should have money this readily available, make them show it. It needs to be liquid, not tied up in an account that's not accessible. 

Seth Weissman is an Atlanta area closing attorney and legal expert, he discusses ideas for protecting sellers when appraisal issues are expected.

Appraisals & the Due Diligence Game

This market is a game of 3D chess on steroids; agents and buyers are tossing everything against the wall to see what sticks. Many buyers want to win the bid then figure out if they really want the home. Many don't and the sellers are tossed back out there; after perhaps losing other legitimate offers. A popular move now is to waive the appraisal but have the buyer's lender order it as a rush. The goal is to have it back before the end of due diligence; if it's low then the buyer simply terminates and walks. Completely permissible under the normal contract.

But what if the listing agent countered that and once again put the pressure back on the buyer? Of course the due diligence period can be shortened but what about a specific stipulation that said something like "All parties agree and acknowledge that if the buyer terminates this offer any time after 72 hours of binding agreement, the seller shall receive all of the earnest money". That eliminates the likelihood of the buyer getting the appraisal back in time to terminate without penalty but still allows time for a home inspection to be completed. In addition, bumping the earnest money up to 2% or 3% will make the buyer think hard before casually tossing an offer. In a sense, the buyer has 3 days (or whatever the seller wants) for the "free look", not the entire due diligence. If the appraisal comes back on day 8 and they terminate, it's not good for the seller but they have the earnest money. This provides a modicum of control to the seller and forces the buyer to consider an offer more carefully than they might.

Shape Offers Before Acceptance

Highest is not always best and best is not always highest. As demonstrated, "waiving the appraisal" doesn't always work out as well as might be expected. Unless the multitude of back doors are nailed shut before binding agreement, sellers and their agent may be taken to school by a well seasoned, savvy buyer's agent. Skilled listing agents will tilt the table for the seller before accepting the offer; as once that's done the buyer controls the process. The ability to properly write stipulations, interpret contract language and manage the contract cannot be overstated; even in strong seller's markets. Having a history of terminations is not appealing to other buyer agents, buyers and appraisers will definitely raise an eyebrow. Crafty buyer agents have a number of ways to position their buyers; that's best countered with a well seasoned listing agent. Experience matters.

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