Oy. We get the client pre approved, then find a home. We negotiate what appears to be a fair price. We submit the loan, and we get the appraisal ordered. When the appraisal comes in, it is below the purchase price. Now what?
Well, I was not expecting this....
Lenders prefer to use independant third parties for the appraisals, called appraisal management companies. These companies, called AMC's, assign the report to a licensed appraiser, who has to bid on the work (turn time, distance and so on). When the appraiser is chosen, that is the end of it from the AMC perspective.
Where is the panic button when I need it?
The seller is upset. So is the the seller's agent. And the buyer's agent for that matter. What do we do?
What I prefer to do BEFORE the appraisal is ever ordered is to have a pre emptive conversation with ALL parties - a "what if" conversation that is based on solutions in case the value comes in low. In that conversation, we discuss whether the client could put more down to make up the difference. We review comparable sales with the agents so we can point to additional comps if necessary.
Internally, when the appraisal is ordered we insist on having the appraisal completed by a local appraiser, even if we have to wait a couple of extra days to complete it. How many times have you had to talk to the lender only to find out that the appraiser is from Fresno and he is appraising San Francisco? Having a local appraiser is vital to knowing any particularly sale important details of a neighborhood, and accounting for this when determining value.
That all sounds great, but what if we STILL get a low appraisal?
Lenders DO allow us to complete a rebuttal regarding value, and to supply additional comparable sales to prove a higher value. This is where being pro active in the beginning can make a large difference. I always carefully examine the comps to see what the value is, and that is where we include the client for total clarity.
Of course, values in the Bay Area have increased substantially in the past 12 months, as they have in other parts of the country so this may not be as urgent as before.
Summary
Realtors are usually very clear about the true value of the home, and have a great understanding of the area from a value perspective. This is why I choose to include the realtors up front regarding this to ensure that we are rigorous in determining the value expectations before ordering it.
If everyone involved is aware of potential concerns and they are addressed up front, no panic button is needed!
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