Getting past the appraisal is getting harder and harder. . .tough but necessary.

Talking to other agents around the office and working on deals you have opportunity to share experiences.  Not only is it interesting but I usually learn something that I didn't know, or a bit of additional info is gleened that can be added to a subject that I recently learned about.

In this market where lender's underwriting guidelines have necessarily tightened, we hear nightmare stories almost daily now about buyers who thought they were qualified but not under the new guidelines, or the new "declining market" evaluation that has been added to the appraisal review, and more.

I am going to address one thing in particular and that is proper pricing to avoid appraisal issues.

Sellers all want to get top dollar for their home and who could blame them for that.   However, whether the market is seller friendly or not, proper pricing can prevent alot of wasted time before contract and after.   I've been into sellers' homes armed with an up to date CMA for their neighborhood, only to have them inform me that, even after a thorough review of the comps, they expect to price "their" home X amount higher than the highest comparable sale because of XYZ, whatever arbitrary reason you can pluck out of thin air.   Never does it relate to increased square footage that I was not aware of during my evaluation, or anything that adds real "appraised" value to the home.   I think this is all pretty common sense stuff, not difficult to understand at all.   The bank needs to make a sound investment.  

Appraisers certify their evaluation to the lender.   Lenders typically require 3 comparable sales at least.   Recently, since around February 2008, lenders are now asking for 2 or 3 additional comps as a condition to be cleared prior to final underwriting and approval.   That can be very difficult to overcome.    What if the appraiser already used the 3 best comps in his original appraisal?   That's SOP for appraisers I would think, not speaking for the appraiser population as a whole, but just a common sense guess.  

What happens is that when the appraiser is asked for additional comps he will be forced to look for more recent sales, hopefully as strong or stronger than the original comps he used.   What if there are no recent comps?   Then the appraiser is forced to fall back to the less desirable comps to satisfy the lender's condition on the loan.   The less desirable, or "second string" comps, may not satisfy that lender's very "subjective" evaluation in order to clear the condition put on the loan by the underwriter.  The "second string" comps might even fall below the contract price.   That's an issue.

What happens then?   The lender will ask the seller to reduce the price by X%, or require the buyer to bring additional cash to closing.   I've been hearing anything from 5-10% is becoming the norm.

Then, you guessed it.   The deal is usually done.   Wasted time and alot of disappointment for all concerned, including the agents.   All of that work and you don't get paid - it is not a pretty picture.   On top of marketing time and expenses, you were in escrow and all that is involved with that for 30 days or more and now you won't get paid.   Anybody who says that real estate agents are overpaid, I encourage them to get a license.  I digress.

Back to the original blog:   Buyers don't usually have the extra cash and sellers don't always see the wisdom in making the concession in price and getting on with the sale.    

If the highest comp in your neighborhood - same number of bedrooms and same/very similar finished square footage sold for $350,000 within the past year, why would you price your home at $400,000?   Sellers who want to ignore the market, the comps, and their agent's professional opinions and recommendations and overprice their homes are the very same sellers who become very disenchanted and frustrated with the process after a short period of time, and begin to blame their agent for lack of interest in the market.    It's  not the agent's fault.   I read a quote not too long ago and it was so right on for this situation.  

"I can put a 50' billboard in your front yard but if the house is overpriced, I'm simply advertising the wrong price. "

No amount of advertising or internet exposure is going to sell a grossly overpriced home.   If your car is valued at $10,000 on edmunds.com, do you ask $15,000 for it?   Why would you?   The point is that you wouldn't because it would be a waste of your time and no one would come to see your car.

I've heard everything from "our yard looks nicer", "we changed all of our door knobs and light fixtures", to, probably my personal favorite, "I've been in that house and it's a mess".   Our furnishings look alot better "staged" than theirs, blah, blah, blah.   

When do we as a society begin to take the process of selling residential real estate seriously?   For most of us, this is our single largest investment, perhaps only behind our 401K accounts. 

If your stock broker told you that the hot stock you want to buy doesn't look like a good investment, would you buy it anyway?    If your doctor tells you that you need to have an MRI, do you ignore him?

If your home is overpriced it probably won't be shown.   Experienced agents in the area won't waste time showing qualified and motivated buyers overpriced properties - there's no upside there - even if your buyer loves it there is a very good chance, especially now, that it won't get past an appraisal.   Then you wasted at least 30 days in escrow & have to start over.   What if your buyer needs to move by a certain date?   The buyer agent is going to be very careful about selecting potential properties for this buyer - even in the best of circumstances a timeline can be disrupted, but with an overpriced property, forget it.   You are asking for trouble.   Besides, gas is not cheap anymore!  

If your home is overpriced and a buyer agent does show it, let's say the buyer likes it, and asks their buyer agent to pull comps, what happens then?   The buyer and the buyer agent quickly learn that they probably wasted time seeing that house and will probably move on without making an offer.   It happens every day.   I've even had buyer's agents contact me to say "help me out with the comps"; "I'm having trouble getting comps for your list price".   All the listing agent can do at that point is spin it - seriously, discuss the closest comps to your inflated price, play up the features of the house, and pray.   Spin.   Not facts, just spin.  That's all you are left with.

Sellers need to come to grips with reality.   When sellers become buyers they get it.   Why don't they get it when they are selling?

I've had sellers tell me that they decided to list with another agent because "he can sell my house for more than you said and he's listing it at XXX price when you only wanted to list it at ZZZ."   That's called buying a listing.   Some volume or production agents take every single listing and at whatever price the seller asks for.   That's fine if you want to be a part of someone's "numbers game".   

Don't get me wrong.   I've taken my share of overpriced homes, especially early in my career when, like most agents, you are less confident about your evaluation of the comps and are more willing to be proven wrong, at your own expense.   But, only when I see a glimmer of hope, something awesome, great location, perhaps improvements that could sway an appraisal through adjustments, and only if I think the seller is motivated enough, and smart enough, to eventually come to terms with reality and agree to an appropriate price reduction.   Yes, I'm not ashamed to say it, I could be listing your house with every intention that I will likely need to reduce the price.   If we didn't do that on some of the "borderline" ones we would be going to alot of listing appointments and wasting alot of time and gas and missing alot of dinners with our loved ones for no reason.   Not to mention possibly missing out on some good business and the joy of working with some really nice people that we just like and want to do business with.      Most of the time, for an experienced agent, it works out for all concerned.   But, it only works in a small amount of unique situations and I would never have my listing inventory "heavy" on the side of overpriced properties, even if only by a little.  

Bottom line:   although proper pricing of residential real estate is somewhat subjective, even in the best of times, the market comps will typically render enough concrete data to give an experienced agent the ability to list the property to attract fair and viable offers from the most qualified and motivated buyers in the market.