Experienced Miami agents know how to navigate the highs and lows of what can be a cyclical housing market … and my goodness, are we riding a high wave at the moment!
As you may have read, the pandemic — while serious and tragic in its scope — has had an extraordinary effect on local real estate. Thousands of families and companies from highly taxed and regulated states have made the move to South Florida over the past 12 months, buying up our inventory and driving prices sky-high — particularly single-family homes in the luxury sector. Any home that is correctly priced eventually becomes the subject of a bidding war, keeping agents like me firmly on our toes. Sounds like nothing but smooth sailing for us real estate pros, right?
Not so fast! There’s a strong headwind causing stronger headaches as we sail this particular wave, and it’s called the appraisal process. For those who may not know, an appraisal is an estimate of a home’s market value that is required by the lender whenever a contract is agreed upon by a seller and buyer who plans to use a mortgage. The lender will hire an appraiser who considers the home’s condition, recent sales of comparable homes, and other factors to determine its market value … which may be quite different than the agreed upon price. And that can delay or kill the deal. (The lender must be sure the buyer does not overpay for a property on their books, which they may need to sell themselves at a future time.)
Appraisals are not a major problem in a steady market, but the speedy upswing of sales in such a short time, while wonderful and exciting, is the very thing making appraisals tricky now. Most appraisers are professionals and dialed into the current trends, but in these conditions we too often deal with outdated, overly low appraisals that can wreck sensible contracts, relative to the current market.
As a potential buyer or seller who has come to terms on a price, what can you and your agent do to protect your transaction from this thorny problem? Here are some creative suggestions from myself and my colleagues in the Master Brokers Forum, an elite network of local real estate pros:
Accept Reality: With so little inventory and so much demand, it is unquestionably a seller’s market and buyers will need to adjust accordingly. To avoid any appraisal concerns from the outset, I advise some of my sellers to include a “no appraisal” contingency on their listing sheet, which means the buyer must agree to have their down payment cover the difference between the offer and the appraisal (if the appraisal comes in low). Buyers should be mentally prepared for the difficult possibilities that this contingency will be presented on desirable homes, that they may have to overbid to have their offers considered, that their offers may not appraise, and that they may have to put down more money than originally planned to secure the property. Such are the realities of the current market.
A recent sale of mine demonstrates this concept perfectly. The first buyer loved the home and was willing to pay close to the asking price, but when the appraisal came in $110,000 lower, he just couldn’t go through with the sale. Less than one week later, it sold to an all-cash buyer who let me know he was going to have an appraisal done within the first two weeks. I disclosed what happened with the previous appraisal, but he was still comfortable with his offer. (And he appreciated my transparency!)
Meet in the Middle: If the appraisal is fairly close to the contract price (within a range of $20,000 or so), the sellers may be advised to bend a little to keep a good deal together. If it appears that the property will not appraise and the buyer is willing to add additional down payment and pay above the appraisal (but has a limitation as to how much additional cash they can come up with), a clause could be added to the contract stating that the deal is contingent upon the property appraising for at least “X” amount of dollars, with that number reflecting the amount the lender will provide (say 80% of the offer, plus all the additional cash the buyer is able to come up with). This gives the seller added confidence that even if the property doesn’t appraise, they still could have a sale, and it gives the buyer confidence that they still can purchase the home but are not obligated if it appraises too low and they don’t have all the funds necessary to complete the transaction. (Unfortunately, many of the appraisals we see lately are more than $100,000 below the contract price, so this solution may not always apply.)
Appeal to the Appraiser: As I mentioned, most appraisers are quite professional and willing to consider adjusting their estimate if given convincing information from the agents involved in the sale. This can include Multiple Listing Service (MLS) data and pending sales from reliable sources such as Miami-Dade County’s tax rolls — but not “for sale by owner” data which they cannot corroborate. The appraiser won’t use pending sales as direct comps, but this data may help frame their analysis.
The agents can also submit plans, surveys, features and major upgrades to better illustrate the home’s value. (Instruct your agent to offer this information BEFORE the appraisal to preempt any issues, and insist that they be respectful, diplomatic and graceful in how they present it, as no appraiser will go along with being pressured.) If you believe the appraisal is still too low, another creative solution would be to have your agent find a recently sold or appraised home that is very similar to the contracted property (but sold/appraised at the higher price), and invite the appraiser to visit it with them. This tactic has worked for me in the past.
There is a popular misconception that real estate agents enjoy an easy existence of simply shuttling buyers to listings, prettying up homes to get them sold and accepting big commissions off of other people’s investments. As you can see from the above, the management of appraisals is a great debunker of this myth, as it is one of many knotty and evolving processes in a home sale that require experience, skill, and patience. Whenever you plan to buy or sell a home — regardless of the temperature of the market — trust the advice of a licensed and proven agent to navigate these complex matters and protect your assets.
Master Brokers Forum board member Karen Matluck is a luxury real estate advisor with Compass Aventura, and director of sales for Matluck Group.