Pat Hune, Broker, 1st Southwest Realty, August 2018
I listed a condo in a gated community updated with new paint, carpet, granite counters, appliances, bath cabinets and HVAC unit. The property sold in seven days. Unfortunately the appraisal came back at $12,000 under contract. The appraiser used properties that were not in a gated community, smaller square footage and less upgraded than the subject property. The appraisal was $6,000 less than the sale of a smaller unit in the same community that sold five months ago.
I challenged the appraisal because prices are going up not down. At that time the average and median sales prices are up 9% year over year or .75% per month. Here is an example of the math based on a $120,000 sales price (yes we wish we could buy a condo anywhere in Phoenix today for this price). This means an increase of around ~$900 per month on a $120,000 condo or more than $5,000 in 5 months. Based on the subject property compared to this comp, plus three others I had found nearby, I added the three prices together ($125,673 + $128,614 + $119,394 = $373,681) and divided by 3. The average price for the subject property is $124,560.33.
Unfortunately my argument failed. The buyer decided to change lenders and get another appraisal. This one came in at 5,000 under contract. It is interesting there was a $7,000 difference in appraisal value in less than two weeks.
When a property does not appraise for the contract amount the options are: 1) Seller drops the price, 2) Buyer comes in with more cash to make up the difference, 3) The Seller and Buyer splits the difference, or 4) the buyer cancels. In this situation the buyer and seller still could not come to an agreement so the buyer cancelled. When this happens nobody wins. The buyer did not get the house she very much wanted, lost money on inspections and appraisals and was forced to rent instead of buy. The seller lost time on the market, taxes, insurance, HOA dues, utilities and cancellation fees charged by the HOA and 1031 Exchange Agent.
The condo was put back on the market, sold in seven days for the list price. It is interesting the final sales price was higher than both appraisals.
What can a seller do when the appraisal is not accurate? The only recourse the seller has is to file a complaint with the Board of Appraisers. However this takes time and is too late to save the current deal. Buyers typically want and need to move quickly. Buyers cannot wait because if they don’t cancel within five days of receiving the appraisal they lose their earnest money. Should a seller file a complaint? The short answer is yes. If appraisers are not held accountable for using poor comps then more buyers and sellers will lose.