Pie-in-the-Sky Listing Prices May Not Deliver All They Promise

Pie-in-the-Sky Listing Prices

May Not Deliver All They Promise

Pricing a home depends on many factors. Pie-in-the-Sky Listing Prices may not deliver all they promise. Mortgages themselves are based on actual Comparative Market Analysis (CMA) reports. What does that mean? It means that no matter what Buyers may offer to pay for your home, if they need a Mortgage, the Lender will hire a Professional Licensed Appraiser to analyze the surrounding sales in the past six months. That determination will be the Appraiser’s suggestion to the Lender for the right Sales Price.

When Listing a home, the Listing Agent will prepare a comprehensive CMA for the Seller. To start, let's say the Listing Agent recommends a Listing Price of $465,000.  Having Pie-in-the-Sky Listing Prices on the brain, Seller insists that the Listing Agent price the home at $500,000. 

The question of whether or not to over-price Listings is another topic for another day. Let’s just focus on the process to get a loan in this post.

Hot market and an offer comes in quickly. The Buyer offers the full price with a $25,000 down-payment, leaving a loan amount of 95% or $475,000. Couldn’t be better - right?

Now, for another good detail in our example, we will say that the Buyer was already pre-approved for a loan of up to $500,000. After resolving an Offer Price with the Seller, the Buyer submits the Purchase and Sale Agreement to the Lender. At that point, each Lender hires a professional Licensed Appraiser to analyze the home before confirming a loan amount. 

What if the Appraiser tells the Lender that the home is worth less than the amount agreed between the Seller and the Buyer?  There are three obvious options and yet all three depend on the Buyer's Agent preparing the offer properly.

"Preparing the offer properly" means that the Purchase and Sale Agreement MUST include two specific clauses. One clause allows the Buyer to explore options if the Appraisal doesn't match the offer.  One clause states that the Seller may not force the Buyer to perform if the Appraisal doesn't match the agreed sales price. These clauses protect the Buyer from Pie-in-the-Sky Listing Prices.

OPTIONS:

1.  Buyer adjusts to a higher down-payment
If the Lender research and the Appraisal report state that the home is only worth $450,000, then the Buyer would receive a loan offer for 95% of $450,000 or $427,500. The Buyer might decide to up the down-payment from $25,000 to $72,500 in order to purchase the home.

2. Buyer contacts a second Lender
With a different Lender, one gets the results of a different Appraisal process. The second Appraisal may support the Agreement Purchase Price.   (suggested by Tammy Lankford) 

3. Seller adjusts to Lender's value
When the Lender offers a loan offer for 95% of $450,000 ($427,500), the Buyer may request the Seller to lower the agreed upon Sales Price to the Appraised value. Perhaps the seller would agree and the sale would continue to Closing.

4. Buyer walks away from the purchase
The Seller may refuse to lower the agreed upon Sales Price and the Buyer would have the option to walk away from the purchase.

So - Mr. and Mrs. Seller, in the Spring 2015 Market, with a shortage of available homes, you may be tempted to price your home at the highest amount. Just be sure that you know the way that Mortgages operate. Be aware of the actual options that your Buyer will have if the Appraisal is lower than what you dream the objective value will be for your home.

Choose a Listing Agent who will look out for your best interests and price your home properly. Pie-in-the-Sky Listing Prices may not be all they are cracked up to be.

Have a happy day -

Lynn