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A Millionaire Buyer, A Low Appraisal and the Realtor Who Fell Apart: Can This Deal Be Saved?

THE MILLIONAIRE FINDS HIS DREAM HOUSE

When a 30-something California millionaire had his offer accepted on an exquisite lake view property, he was beyond thrilled.

The listing agent, who would be selling another home to the seller, was overjoyed. The selling agent, (more accustomed to selling $200k foreclosures to first time FHA buyers), could not believe her luck at being involved in a million dollar transaction.

Buyer had been pre-qualified by the preferred Mortgage Broker of the selling agent. Both Realtors were flush with confidence that the transaction would sail smoothly to a close in 30 days.

TROUBLE IN THE MORTGAGE OFFICE: THIS HOUSE WON'T APPRAISE!

But this same glow of confidence was nowhere to be found when the contract arrived in the mortgage office.

After a long silence someone blurted out the unspoken question:

How, pray tell, would this house, in all its splendor, appraise for one million bucks?

After consulting with several of the appraisers on the lender's "approved list", the consensus by the appraisers was unanimous: they would not be able to substantiate the selling price since the house had only about 2000 square feet.

HERE'S WHERE THE REALTOR FALLS APART: ARE HER DEMANDS REASONABLE?

Upon learning the property would not appraise at full value, the Realtor began to fall apart at the seams.

She begged the mortgage broker to somehow "FIX" this problem, by continuing to call appraisers on the list. Surely one would finally agree to appraise this property at the higher value, right?

Buyer's agent also insisted that:

A potential low appraisal was not her problem, it was the problem of the mortgage broker to solve.
She would "spook" the buyer if she revealed this information to him.
Mortgage broker was not to reveal to "her" buyer that the appraisal would come in low, was to forge forward with the loan, including asking buyer to pay for the appraisal.

Seller has enough equity to lower the price, and buyer has enough money to make a larger down payment. Days are ticking on the contract, and on the loan lock. But how do the professionals in this transaction get everyone in this psychological drama to have an amicable meeting of the minds?

WHAT DO YOU THINK? CAN THIS MORTGAGE BE SAVED?

What is the role of the mortgage broker in this drama, if anything? Is she responsible/obligated/in the best position to come up with a strategy?

Do you think the buyer's agent acted correctly in not telling the buyer about the strong potential for a low appraisal? Should mortgage broker agree to withhold this information?

Can this sale be saved? How would you go about it?

Inquiring minds want to know.

Written by Janet Guilbault, Mortgage Lending Specialist Based Out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 02/12/2009 12:33 PM

Comments (30)

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30 Comments on A Millionaire Buyer, A Low Appraisal and the Realtor Who Fell Apart: Can This Deal Be Saved?

FEB

I believe the selling agent should always tell their client what is giong on. I also think that the lender who has already been paid by the buyer is obligated to tell the buyer what is going on. I think it can be saved if the parties agree on a price that appraises, but it seems to me that someone is getting misrepresented. Just my opinion.

Easy solution. Lower the price to the appraisal. Seller should understand that this is going to happen whether it is with this buyer or another.

Lender has not been paid by buyer. Lender is only paid if loan closes.

What about the fact the Realtor has asked the mortgage broker to withhold information?

And this is the same lender who has referred the loan to the mortgage broker?

Angelia: Should buyer be stuck paying for the appraisal if everyone is not even sure the seller will lower the price?

Janet~ First of all, the buyers agent is definitely wrong! She MUST disclose_ no matter what! She has no right to withhold information! The buyer has a agent that is not looking out for the buyer's best interest! The seller will need to sell it for a new agreed upon price. (if both parties can come to an agreement.... the seller will have to take less and the buyer will have to come up with some money most likely) Vickie

Hey Janet... you trying to stir up trouble again? LOL There are several facets to this scenario, so I'll take a stab at a couple of them. I don't care WHAT the Realtor(s) are thinking is the right course of action ~ disclosure to ALL parties is a given! With full disclosure, open dialog, cool heads and being solution-oriented, this deal CAN and SHOULD be saved. The property will have to appraise on ANY deal in the future, and if the seller knows that, it should be a no-brainer that he reduces the contract price to the appraised value. If handled properly, the buyer should not be rattled. If he was willing to buy the house at the higher price, then he should be a happy camper to buy it at the appraised value. As for the cost of the appraisal, on a $1MM property, who gives a rip? Just my 2 cents... Nice post/dilemma!

Randy Hooker - Dreamcatcher Realty - Arizona Real Estate

Okay Vickie, I see your point and I agree. However she is not suggesting withholding the information forever, only until the actual appraisal is done.

And what about the listing agent? Shouldn't one of the very first steps be for him to contact the seller? If he absolutely will not sell for the lower price, why would everyone continue to invest their time?

Here are my thoughts... First the mortgage broker needs to call the principal broker for the company that supervises the buyer agent and inform them of her breech of fiduciary duties. Ask the principal broker to step into the transaction. Then...The mortgage broker needs to talk with the buyer directly and tell them the house most likely will not appraise. The buyer is their client, not the buyer agent. I would of course give the buyer agent the courtesy that they will be sharing this information with the buyer.

The house needs to be lowered to the appraised value and that is what the buyer agent should be requesting. The listing agent knows that buyers of these types of properties are few and far between. They will lower the price if they are motivated.

Then the deal closes or terminates, the mortgage broker should file a complaint with the real estate agency for the agent breaching their fiduciary duties to the buyer.

We all complain about the poor quality of agents and mortgage brokers in the industry but then do nothing about it. The buyer agent is clearly wrong.

Hey Randy: I prefer to think of it as encouraging people to think and express opinions colored with a glimpse inside of my life.

Okay, yes. Stirring things up.

You may think it is a no brainer. But I have had listing agents ask me this: If the buyer is qualified to buy the house at 1,000,000 why can't he still pay a million for it?

Huh? Like they don't get the extra down payment involved.

I am not sure why everyone thinks the seller will just drop his drawers price without at least trying to get the buyer to pay more. Seller could make a valid point that appriasal is lower because of desperate sellers REO properties (yes, these happen in million $ neighborhoods too.

Okay I read your clarification that the agent just wants to hold off having the conversation until after the appraisal. I would still talk to the principal broker, but I wouldn't file a complaint just yet...

I had many concerns about properties appraising last year and got into a "pissing" match with another agent over the fact that the comps clearly did not support the house price. The home appraised right where I thought it would. In fact we wrote into the contract that the sellers would reimburse the buyer for the appraisal and home inspection OR automatically drop the price. The sellers decided to not drop the price and the house is rented now, BUT my buyers still got their money back.

You may think it is a no brainer. But I have had listing agents ask me this: If the buyer is qualified to buy the house at 1,000,000 why can't he still pay a million for it?

This is solely determined by market forces. No sane buyer should be encouraged to pay more than a home is worth in this market. It is not a financially sound decision especially with all of the option and Alt-A concerns on the horizon.

Melina: Just an observation: Do you think the mortgage broker would do this if the Realtor involved had sent her many referrals over the last year? It is somewhat of a conflict of interest, don't you agree?

I do agree the buyer should be told by the mortgage broker.

But I think the mortgage broker should ask the Realtor for a meeting where a discussion takes place about the strategy of handling this situation.

At that time, to simply say this to the Realtor: We need to let the buyer know now, and it is my place to tell him. After we get his input, we will move forward.

Mortgage broker and Realtor always need to be united and on the same team!!!!!

Yes that would be a conflict of interest, but paying fines or losing a license isn't worth it. That's why I think having a conversation with the principal broker is a good idea. It could be a three way conversation or meeting between all parties. I just think that when someone's ethics are compromised due to the large payout on the horizon, it helps to have someone else step in and guide them back to where they should be.

I am hearing more and more breeches of ethics as agents struggle to pay bills in this marketplace.

It doesn't have to be a mean or nasty meeting, but it does need to occur. The principal broker needs to know that the agent is having some ethical problems. They can provide support, training, and intervene as needed to solve the problem.

GEEZ! I'm a buyer's agent and I love low appraisals. Clearly, the home was overpriced which information should have been given the buyer before they wrote the contract.

If the buyer is provided with comps, they offer accordingly and if the negotiations take the price higher than the offer, they at least know the risk that they'll be faced with the possibility of paying over appraisal if they still want the house.

Of course the buyer's agent must tell the buyer about the appraisal. If she doesn't do it quickly, the lender will have to. There is no rule that the lender cannot communicate with the buyer.

Of course, I believe that a buyer who pays more than appraised value needs their head examined, but shucks, it's a free country and if they want the house and plan to stay for quite a while, in time they may be O.K.

One thing is for sure, it's all going to come out quickly. The buyer's agent better get busy and get that contract price lowered to a mutually agreeable price. Shopping for appraisals is not the answer and can lead to dangerious grounds.

If the buyer has an appraisal contingency, which everyone should in this market, they can kill the contract and write an offer at appraised value.

Ain't real estate fun???

Melina: Meaning the adjustable rate mortgages that will be defaulting in the near future causing prices to drop even lower?

Lenn: Yeah, ain't it grand? I am a mortgage broker and I hate low appraisals. You should too based on your premise that people who are underwater with their mortgages should be helped.

This transaction had a willing buyer and willing seller. By allowing THAT premise instead of the willing buyer/desperate seller premise to determine value, this neighborhood would have a higher comp, and a better chance the other houses would be pulled up in value.

That said, I just wish appraisals were attached to listings and all houses placed on the market had one ALREADY DONE.

Why do we wait until so much is invested to have an appraisal?

Did anyone think that one of the reasons we are in the mess we find in the real estate market is because properties were over-appraised in the past due to pressure from those involved in the transaction? New rules are coming (already there where I work) that prevent the loan officer from shopping the appraisal to get the highest value. As far as the buyer is concerned, their agent should keep them up to date on what is happening. Does the term "Fiduciary Responsibility" mean anything to the agents?

Janet-my understanding is that many of the Alt-A, and option ARM's were on more expensive homes. We don't have a lot of those out here in Oregon so I'm not all that familiar with them, but I guess I'm thinking those loan defaults will have a larger impact on the luxury market.

I also do what Lenn does where I do a CMA for my clients before we write an offer. I know if there is going to be an appraisal problem or not.

Janet,

You already answered this with "Seller has enough equity to lower the price, and buyer has enough money to make a larger down payment. " It HAS to be renegotiated or it will not close.

Of course, the buyer's agent was wrong to withhold information from her client, and the mortgage broker shouldn't either. It is the responsibility of the BA & SA to work with their respective clients to get this resolved, and time is of the essence.

Judy

I may not be in the norm, but I would tell my buyer if the appraisal came in low. Heck, we wouldn't even get that far. My research prior to writing the offer would tell us where that home should have been priced. I wouldn't wait for the mortgage lender to tell the buyer, I would do it myself.

Million dollar buyer or $50,000 buyer doesn't matter. Each buyer deserves to have the market analyzed for them and the home they are wanting to purchase researched so that they can make an educated decision proir to writing the offer. I do not want my buyers to pay for a home inspection and an appraisal until they are fully informed.

All of this doesn't make me too popular with listing agents.. :-)

As always I love your creative writing style. I did notice one piece of missing information. How much lower is the appraisal expected to come in at? Are we talking a few thousand or hundreds of thousands lower?

I agree with Randy, all parties should be advised of the situation and with cool calm thinking come to a solution. The seller should be told that in this market the home is not worth what he/she was expecting and will therefore need to make a decision on whether he/she is willing to decrease the asking price and sell now or hold off until the market improves down the road.

The buyer should be advised that the home may not appraise for the asking price and decide how he wants to proceed. I know that I might have been willing to pay a great deal more for my house because I was emotionally in love with it (emotions are powerful). I do however, agree with Melina that "No sane buyer should be encouraged to pay more than a home is worth in this market". It is ultimately the buyers decision to make not the agents.

If both parties are abreast of the situation and are willing to "meet in the middle" then obviously a solution can be made. It sounds like between the buyer and the seller your off to a good start. "Seller has enough equity to lower the price, and buyer has enough money to make a larger down payment."

I agree with Alan that this is the exact reason rules are changing regarding the appraisal ordering practices.

Seems to me that the agents are desperate and hungry. When people are desperate and hungry they tend make some amazingly unethical decisions that they might not otherwise make. Being upfront and forthcoming may mean that it may not work for this particular buyer and this seller but I don't feel your integrity should ever be for sale.

Alan: As a mortgage broker I am actually thrilled to have the appraisal issue off my back and onto the lender's back.

The reason is in my post. Please note Realtor is blaming mortgage broker for not being able to find an appraiser that will make the deal work. This in not the job of the mortgage broker.

I do not agree that the selling agent should tell the borrower that there is potential for a low appraisal. That is part of the mortgage process and should be the job of the mortgage broker to inform all 2 parties: the buyer, and the 2 agents involved.

The buyer will need to know how this will impact his loan (and that he will need to invest the $ for the appraisal) The listing agent is important here. Only he has a clue if the seller is willing to lower the price.

Judy, I agree with you.

Lenn told me on one of her comments that she will pay for the appraisal to move the transaction forward. It is probably why she (and others) check values for their buyers.

Kris: Why are you not popular with listing agents? Do the sellers need to pay for these items?

Janet, In my opinion the first thing that needs to happen is the property needs to be appraised. Give me a figure to work with. I guess I could be talking as either agent at this point.

As the listing broker I would have immediately made my seller aware of the potential issue. Then I would check the contract to see whether or not the deal is even contingent on the appraisal. A property does NOT have to sell at appraised value. Properties sell for higher than appraised value every day. The buyer and the seller have already agreed to the price...the appraisal does not change the agreed price. However it could very well affect financing.

If I were the buyer's agent I would tell them immediately of the issue and ask them if they want to try and get out of the contract now or go ahead and order the appraisal.

As the mortgage broker I would order the appraisal if it has been paid for.

From the what you have written it sounds like the appraisal needs to be done so the buyer and seller can renegotiate of necesary. The agents should both be ashamed of themselves for placing their commission ahead of their customer/clients.

Bryant: I like your resonse. You and I would get along well...but knew that, right?

Yes, we need an appraisal! Buyers and sellers don't like dealing in "what if's".

Listing agent is a HUGE deal at this point. And you are so right. The low appraisal does not mean that the seller has to sell at the appraised price. But at least we need to know if he is even open to lowering the price (and by how much).

Why, as the listing agent, would I advise him to drop his price to the appraised price? Especially if he owns a unique one of a kind property. I agree with the comment above: I would definately pay more than appraised price to get just what I wanted...especially if I was flush with cash from selling my Internet company.

I admit I am an emotional buyer when buying my own properties. I paid FULL price to get my Lakehouse in a down market just like this.

I have never regretted that decision but others thought I was off my rocker. Hey...sometimes your heart can over rule your head.

I have no problem as the mortgage broker telling the buyer he must pay for the appraisal. It is ok for him to have some skin in the game, too.

Hi Janet,

Lots of food for thought.... I am not so quick to think that the seller should reduce or that emotions alone would cause a buyer and seller to agree to a price that can't comp. In our area there are very few cookie-cutter properties. It's all too likely that the right price /market value will not be supported by comps that fall within the current guidelines for location and timing - not to mention getting 5 or 6 of them or however many are being asked for nowadays. We've been experiencing fairly low inventory too so again it would not be surprising to run into trouble when a certain type of listing comes on and goes under agreement - nothing like it, in as desirable a location may have sold in the last six months. But does that mean that it isn't worth the price that seller and buyer have agreed to?

No question about it - these are challenging times in so many ways.

Liz

It seems to me that the buyers agent needs to be honest with her client. I don't see why the buyer would be spooked by the lower appraisal if its still his dream home. This deal is very do able if the parties involved act honestly. The mortgage person is in no way at fault nor responsible to make this deal happen. In my mind its on the buyers agent.

FEB

Justin: The mortgage broker has the ability to be an enormous help to these agents. Why? Because I have often observed that when negotiations are re-opened after a low appraisal, buyers and seller get very uncomfortable. They wonder if the agents are watching out for what is best for them, or best for their commission.

How do I know? They tell me!!!!

For this reason, I will normally write a letter explaining the situation and suggesting some compromises. Although the letter is addressed to the agents, they will usually use it to show to the buyer and the seller.

After all, unless an acceptable mortgage is written.....nothing is going to happen.

This works well for me, but I do notice other mortgage brokers upset because they think agents fall apart and expect them to do something. Me? I love being in charge and if I get the green light from the agents, I will negotiate it out myself.

Janet - The appraisal issue is one of the biggest hot buttons we face in the mortgage industry right now, due to what you are describing - undue influence by the parties to the transaction. I'm hearing that appraiser are making adjustments in their values in declining market areas like California, which is likely to come to light one day with more and more low appraisals as a result of this. The pendulum swings to both extremes on this issue. But my position- disclose, disclose, disclose! We have a fiduciary responsiblity to let the buyer know in a timely manner. I am very grateful I have not been in a transaction with aRealtor partner that ever led to the circumstances you are dealing with. They must all do CMAs before writing their offers, as Melina and Lenn discuss.

FEB

Sounds like the buyer's agent was a little greedy and wanted that bigger commission. Shame on her/him. It is the agent's fiduciary duty to their client to let them know what is going on immediately. It is then the Buyer's decision as where to go from there.

Roxanne Schilling, Realtor at Lake Tulloch and loving it!

FEB

Janet- I'm in agreement with so many of the commenters and feel that it is the duty and responsibility of all of the parties involved to be honest, ethical and realistic with their clients from the get go.

The SA should have done their homework before listing the property and made the seller aware of what the comps in the area were and if they were going to list the home for higher than the comps then they either needed to develop their plan to justify the price or be prepared for lower priced offers and/or appraisals. If the SA did know what the comps were and didn't prepare the seller for low offers/appraisals, they did their seller a disservice

The BA should have provided their buyer with the comps for the area before either showing the property and/or making the offer. That way, if the buyer wanted to make a higher offer in order to get their offer accepted, then the buyer would be aware that they are paying higher than the area comps. If the BA didn't do this for their buyer, then they did their buyer a disservice.

The moment a buyer enters a contract with an LO/MB, they become the LO/MB client, regardless of who the Realtor is or how they were referred to the LO/MB, and that LO/MB has a duty and responsibility of being honest, ethical and realistic with their client about all of the phases of the loan process and transaction. Once again, had the buyer been informed from the begininning that their offer was higher than comps, then the lower appraisal wouldn't come as such of a surprise and/or deal breaker. For the LO/MB to withhold the appraisal info from the buyer is doing the buyer a disservice.

If the professionals (Realtors/LO/MB) had been honest and upfront with their clients from the get go, a low appraisal may not be such a deal breaker. If the seller was prepared for this, then they could decide whether or not they want to lower the price or not to sell the property. If the buyer was prepared for this, then they could decide whether or not they want to increase their down payment or not to buy the property.

We talk about improving our image with the consumer, well I believe it starts with being honest, ethical and realistic with our clients from the get go

FEB

Its simple. I would have sellers lower their price. Because this issue will keep coming up if they don't fix the problem

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