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Wednesday, September 16, 2015

FSBO: How to Get a Good Appraisal

When I set out to sell my Brooklyn apartment FSBO in 2013, I was expecting a challenge with the appraisal. Though the real estate market in NYC had fully recovered from the wake of the housing bubble of 2008 and prices were back up, lender appraisals were not keeping up with fair market values. I knew that I had to take charge of the process to ensure that the appraiser assigned by my buyer's lender would have all the information I needed them to have at their fingertips.

Looking at comps in my neighborhood - my subscription to "insider" showed me what homes actually sold for not just what they listed for - I was 100% certain that I would get my asking price due to 1. very very low inventory in what was now the hottest Brooklyn neighborhood and 2. the desirability of my home, given the thoughtful renovation I had done and the unusually large private back garden.

I was equally certain that the bank appraisal would come in low.

I was on the board of my co-op and privy to the details of sales contracts and mortgage refinances, so I was seeing firsthand what the other units in our building were appraising for. The backlash against mortgage appraisals post housing bubble made banks skittish. Regulatory changes had been put in place to ensure appraisals were not "inflated" with the result that appraisals were now swinging cautiously the other way, toward under-valuation.

I set out to manage this by:

  • Pricing and marketing the home such that I would get competitive bids
  • Getting a cash buyer or, failing that, an offer that waived contingencies
  • Creating a stellar comps package to help the bank appraiser make the best valuation

The appraisal happens after:

  • The buyer has made an offer and shown proof of mortgage pre-approval (if he is getting a mortgage)
  • The seller has accepted the offer
  • The buyer has signed the contract and put down a deposit (customarily, 10% of the offer price) - which he will forfeit to the seller if he withdraws his offer

There are only a few circumstances in which the buyer can withdraw without forfeiting his deposit:
  • Mortgage contingency: The bank refuses to give the buyer the loan (if he is getting one)
  • Home inspection contingency: The home inspection turns up something major
  • Appraisal contingency: The home appraises for less than the offer price, causing the lender to decrease the amount of the loan

All of these instances allow the buyer to get out of the contract, but more often they do not nix the deal but simply introduce another round of negotiation between buyer and seller. When a home appraises for less than the offer price, for example, the lender's appraiser is telling the bank the home is not worth x it is worth z. The lender will then lower the amount of money it will loan the buyer. The buyer has three choices:
  • Get out of the deal altogether without forfeiting his deposit
  • Make up the difference out of his own pocket
  • Renegotiate the purchase price with the seller

Say the offer price is $550k but the home appraises for $500k. That's a difference of $50k. The standard compromise is the buyer and seller split the difference, thus the purchase price is reduced to $525k.

I wanted to avoid ever getting to this point.

With a big renovation planned for our new home, I was looking at that $25k as my renovations budget and I would need every penny. So, what did I do?

  • Staged my home and had professional photos taken
  • Marketed my home online, where I knew Millennials moving into my neighborhood would be looking (StreetEasy, Zillow Postlets, Facebook,
  • Scheduled perspective buyers appointments to overlap - so that the competition would "see" and "hear" one another
  • Obtained competing bids
  • Negotiated waiver of the appraisal contingency with the perspective buyer who was most eager to win the home
  • Created a stellar comps package to help the lender's appraiser make the best valuation

What was that last thing? You can create a comps package for the lender's appraiser? 

Yes, you can and you should. Savvy real estate agents do this all the time. 

Many people do not know that you can communicate with the lender's appraiser. In fact, as the owner you actually have a little more leeway to communicate than the average real estate agent does, due to stricter guidelines post-housing bubble. 

And the time for you to communicate is before the appraiser has issued his appraisal. Because after he has issued it, if the appraisal is low, the window is closed for you to influence his decision.

I always arrange to be there for the appraisal inspection, to provide the appraiser with supporting information if he has questions. 

I made a case for how the floor plans affected market pricing

The key is to make his job easy. Provide him with sources for the information he will be researching, such as the boundaries and desirability of your neighborhood, and include links so that he can view the information himself. 

I created a 10-page comps summary for my buyer's bank appraiser - to explain the thinking behind my pricing, offer remodel costs that included an appliances list, as well as comparable sales in the neighborhood. My main objective was to explain why some same-size units in my very co-op were selling for less - so I provided a side by side comparison of floor plans and explained why floor plan affects pricing. In addition, I provided a copy of the contract and appraisal that had been done when I purchased the place 8 years previous. I pointed out mistakes that had been made in the measurements of the backyard, so that he didn't duplicate those mistakes that would diminish the value. As a bonus, one of the comparables that had been used in the previous appraisal had just sold again, and I pointed this out. It was very valuable for the appraiser to see that this previous comp in the neighborhood had also risen in value. I also included my co-op's financial statements from the last annual meeting, to show that the building itself was in sound financial shape. 

You want to be careful not to be pushy with the appraiser, of course. This is not the time to launch into a lecture on home values. Simply introduce yourself as the property owner and say that you are here to answer any questions he may have. Hand him your comps report, saying: "Here are some comparables in the neighborhood and how we arrived at the sale price. My contact information is in there if you have any questions." Then get out of the appraiser's way and let him do his job. The key is to be useful to him and not a nuisance. Make his job easier by ensuring that he has all the information at his fingertips that shows your property to its best advantage.