How to Avoid a Low Appraisal

Learning how to avoid a low appraisal is something the vast majority of agents will never understand. There is no sure fire way to avoid a low appraisal but there are ways to approach the challenge and present support that bolsters the contract. Agents are quick to blame the dreaded “low appraisal” for deals that fail to close; they should instead seek to understand how appraisers are required to work.

Appeals are an option of course if a low appraisal is received but it’s best to avoid issues whenever possible. That takes an understanding of how an appraiser works and providing them data that isn’t complete nonsense. The idea of getting a home appraised before listing is often pushed by agents but in almost every situation, prelisting appraisals are a waste of money for sellers. Agents that push them are often simply looking to avoid work or are unqualified to complete the deep research needed to advise their client.

Most agents have no idea what constitutes appropriate data for an appraiser and most lack an understanding of the overall process. They are quick to blame instead of looking to understand the process, provide usable data and assist as needed.

Sometimes however, the market moves so fast that appraisers cannot find suitable comps to meet underwriting criteria. This market (mid 2017) is just that; sellers can and should exploit the advantage they enjoy and that routinely means pushing and passing the limit on price. What happens when buyers line up with offers and suddenly you have one that is well past the comps? Well that depends on the agent. This is the time where the pros separate themselves from the hacks, where 85% of agents cost their sellers money and pass the blame to everyone else.

We had one such deal with a town home seller in a highly desirable area and community, one that we felt belonged ahead of the few comps. We didn’t just push, we blew up the line and ended up a good 25% over the comps – but we had 16 showings and multiple offers in the first two days. Now we had to convince the appraiser that the market was right. Be non-confrontational and provide assistance, use appropriate and applicable data. Don’t try to BS it; appraisers have little patience for that.

Contact the Appraiser Ahead of the Visit

We had the appraiser’s contact info; a cover letter was drafted and sent, we laid it out honestly…

“When we priced this, we looked at market past, present and expected. This area, this price point and this type of unit are highly desirable for both first timers and investors, they do not last and this one didn’t either. We had immediate interest – 16 showings in 2 days and multiple offers. Expecting appraisal challenges (I’ve been doing this 30 years, 24 here) we leaned toward the cash buyers. It’s going to be difficult to resolve the current demand with the historical data, that’s always an appraisal challenge in a fast appreciating market.”

Simple and to the point. Offer appropriate data, the logic behind the pricing, summarize activity and provide whatever possible to support the position. Always provide contact information and ALWAYS met the appraiser on site. Meet them – DO NOT HANG AROUND. We find it best to email everything and provide a hard copy on site as well.

Comparable Sales Data

Appraisers are expected to use comparables that are reasonable alternative purchases to the subject. If the subject wasn’t available, one of them is expected to fill the same role. This means physically at the same or similar price point. Agents love to push homes significantly better equipped and higher priced just to get something out there, this is stupid and counterproductive.

In this case, we ran 3BR/2B units in the same middle school district within a mile and closing within the last 16 months. The FMLS summary sheet is easy to read and displays the key information needed so that additional research can be completed later.

It’s alarming that most agents have no idea how to search for sale not listed in the MLS. They will miss “by owner” sales and anything completed outside of the MLS, appraisers might on occasion as well. If there’s enough data off the MLS, some will just use that and leave it there. In this case, we needed to search every avenue and on Realist Tax we pulled four legitimate sales not found in the FMLS and they tended to support our offer price.

In Atlanta, we have the FMLS as well as GAMLS. Again, most agents have little idea how to use GAMLS. Here we pulled one additional sale which was well over the FMLS and more in line with the contract. We know had several closed and suitable sales to at least present a legitimate case for the offer price.

Additional Supportive Data

Our contention is that this market is such a strong seller’s market that buyers are paying at an above list. That of course has to be supported by data. Months of inventory (MOI) is a great indicator of the market; is a measure of how fast all the existing homes on the market would last assuming a) no more listings are added, and b) the rate at which homes sell is a constant figure based on the average of the last 12 months of sales. 100 homes on the market selling at a rate of 20 per month means there is 5 months of inventory. 4-6 months is a balance market; below favors sellers and above, buyers.

We ran a much focused look at the MOI for homes like the subject, is shows that since Jan 2015, it’s been a strong seller’s market; right now there’s a month of inventory. Again, very specific and narrow to reflect this micro market.

Everyone is obsessed with sale prices and value trends and that’s another part of our position; we contend rising prices and the chart shows that to be true. Again, a narrowed look at the micro market for this type of home – just as the appraiser will view it – and we see about an 11% increase in median sale price from Jan 2015 to May 2017.

Very few homes for sale, very strong buyer’s market, rising median values all supported by narrow and specific data. This perfectly fits our contention as does the real world result of multiple offers right out of the gate.

Does all of this always work? Of course not. Appraisers have to write for underwriters; the industry has been brutalized since the crash and the remaining appraisers are under constant evaluation. In many cases, they will stray little from the standard data even in very active markets like this. However, agents must make a legitimate effort to support their clients and learn how an appraiser analyzes data. This skill will make a difference.

Questions? Maybe we should talk.

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