11.02.2012

How to Prevent Low Appraisals from Destroying your Real Estate Transactions

A National Association of REALTORS (NAR) survey conducted in September 2012 reported that an astonishing 35% of real estate transactions were disrupted due to low appraisals.  So what can real estate agents do to prevent their clients from experiencing this dramatically frustrating and stressful occurrence? The simple answer is to do a better job of managing their clients' expectations.

Managing Expectations

I live in Visalia, California at the base of the Sierra Nevada Mountain Range.  I have therefore driven many friends and family members up to Sequoia National Park to witness the splendor of the Giant Sequoia Trees and other beautiful scenery.  The drive has many sharp and winding switchbacks that can easily cause severe nausea and headaches. I've noted that every time I've failed to mention this fact my passengers experience a very difficult journey, yet when I manage their expectations beforehand by informing them of the difficult road ahead they tend to take the trek in stride without much complaint at all.  Their mindsets were prepared for a challenging experience, so when they encountered the winding road it didn't seem so shockingly bad.

 Describing the Road Ahead

Agents must use due diligence to provide clients with all of the material facts to make informed decisions.  Without thorough knowledge of the winding appraisal road ahead it becomes difficult for clients to make home pricing choices, submit acceptable offers to purchase, effectively negotiate counter offers, and even plan their move properly.

For example, an agent might use the following script in order to manage client expectations through factual disclosure:

"Appraised value is not fair market value - what a willing buyer would pay from a willing seller. Instead, real estate is heavily regulated by a third party appraiser that can step in and reduce an agreed upon price if it is not in alignment with the Uniform Standards of Appraisal Practice."

The following should also be explained:
  • Many appraisers are using foreclosures & short sales as comparable homes and are not making adjustments for market conditions or the condition of the property.
  • Many appraisers are required to use up to 8 or 10 comparable sales, which almost guarantees the use of distressed properties as comparable sales.
  • Appraised values typically do not reflect market conditions such as rising prices, the presence of multiple bids to purchase homes and low inventory.
  • Appraised values are very inconsistent and fluctuate wildly.
  • Turn-around time by both banks and appraisers is slow, which delays closings.
  • Out-of-town appraisers, who are not familiar with the area or local market conditions, are frequently being used.

Preparing Mindset

In light of the litany of troubling facts that have just been unveiled, it is essential to help clients adapt their mindsets to their specific situations and plans of action.  A large amount of unexpected information can cause stress and frustration, so it is important to help clients by providing them with some neurological organization so that they can quickly understand how to view the new situation and act accordingly.  Or simply, an agent must help show them how to think.  For example, a great script at a listing appointment might look like the following:

"Mr. and Mrs. Smith, I will need to sell your house twice before you will be able to move.  I will need to first sell your home to a willing buyer, and then a second time to a bank, or the bank's appraiser.  The second sale to the appraiser may be the more difficult sale to make, but I promise to work diligently on your behalf and keep you completely informed throughout the process."
It is equally important for agents to relate to client frustrations with the appraisal dilemma. A good way to accomplish this is to mirror client frustration and truthfully explain how appraisals frustrate agents as well:

"I can completely relate to your frustration as appraisals have made our job as real estate professionals much more difficult. You see, appraisers determine what a home was worth in the past and real estate agents look into the future to determine what it will sell for."

Be sure to keep in mind that is well worth the time it takes to explain the rough road conditions ahead.  Preparation diminishes the severity of the conditions and passengers won't jump out of the vehicle blaming the driver before reaching the ultimate destination!