Imagine the following scenario...

You've listed your home for sale.  Within one day you receive multiple purchase offers at or near your asking price.  Negotiations take place until you come to terms on the sale with one of the buyers.  Everyone is happy; a dream-come-true.

That dream turns into a nightmare as the deal progresses toward closing.  The buyer's lender orders an appraisal as part of the loan process and everyone is shocked when the appraiser values the house for less than the proposed loan amount.  A transaction that has been rolling along has now skidded off the tracks.  Decisions have to be made.  Will the buyer pay the asking price even though it is more than appraised value?  Will the seller accept less in order to save the deal?  Can the two sides split the difference?

This unfortunate scenario has been playing out more and more often across Rutherford County in the past few months. 

Even though Murfreesboro's real estate market is relatively solid and has not been subjected to the drastic price fluctuations of other markets such as California, Florida, Arizona, Nevada, and Michigan, we are still forced to pay a price for their problems.  As consumers, lenders, and real estate professionals in those markets run for cover amid plummeting home prices and record foreclosure rates, the financial markets have tightened up all aspects of mortgage lending, including the appraisal process.

In the past few years, loose (in some cases out-and-out fraudulent) appraisals have played a significant role in the ability of people to refinance money out of their homes or wrap huge amounts of closing costs into their property purchases.  This was great when home values were on the upswing and sellers ruled the market.  Today, however, in a buyers' market with values flat or declining in some locations, appraisals have tightened up.  In many cases, unexpectedly low appraisals have been like the proverbial frying pan to the face of all participants in a deal.  Without a strong real estate professional involved, too many of these transactions fall to pieces as soon as the appraisal is delivered.

So what can you do to avoid or minimize the effect of a low appraisal?

1. Realize what the appraisal represents.  An appraisal is not what the house is "worth".  What the house is worth is determined by what a buyer is willing to pay for it on the open market.  In the above scenario, the agreed-upon price is what the home was worth.  The appraisal is the value upon which the bank is willing to base its mortgage calculations.  This may sound like we're splitting hairs.  In affordable neighborhoods and transactions where buyers have little cash to bring to the table, the bank appraisal might as well be the value because purchasers don't have the wherewithal to fork over extra money when the appraisal comes up short.  However, in higher-priced and unique homes, buyers are often more willing to make up the difference.

2. Be prepared.  If you're selling your home, consider paying for a pre-appraisal.  For a few hundred dollars, you can hire an appraiser to come up with a valuation of your home.  Having done your own due diligence, you have a stronger position to negotiate with potential buyers that the sale not be contingent upon the buyer's mortgage appraisal.  If the contingency is in place and the lender's appraisal comes in lower than yours, you have your appraiser's written argument as to why your home should be valued higher.  If your pre-appraisal comes in low, at least you know what you're up against so you and your Realtor can plan accordingly before you even put the house on the market.

3. Don't give up.  A low appraisal does not have to kill your deal.  If you're a buyer, you absolutely love the house, and you have the cash to come up with the difference, consider going forward with the purchase.  After all, you thought the house was worth what you offered when you offered it.  What has really changed since then?  If you're the seller, consider the cost of putting the house back on the market before refusing to come down on your price.  You will have the expense of ongoing mortgage payments, the inconvenience of keeping your house showing-ready, and the appraisal issue will still be in play the next time you get an offer.

4. When you hire a Realtor, don't skimp on experience.  A changing market like we're in now, is not the time to trust one of your most important investments to some rookie who's getting on-the-job training at your expense.  Choose a real estate professional or team that has withstood the test of time, excelling in all types of markets.  The John Jones Team has sold thousands of homes and at one time or another has faced just about every conceivable problem, concern, challenge, and roadblock a real estate transaction has to offer, including low appraisals.  We know how to deal with these kinds of situations and we'd love to put our years of experience and success to work for you.  Whether you are buying, selling, or just thinking about it give us a call at 615-867-3020 and we'll be happy to assist you with all your real estate needs.