During a recent transaction, a week before closing, the appraisal came in $10,000 lower than the contracted sales price. It also revealed that the home was about 200 square feet smaller than we thought (assessor records mistakenly included the detached garage in the home's square footage).
What to do?
The Colorado contract allows for buyers to cancel at this point and get their earnest money returned. But most buyers don't want to. Typically, this becomes another "opportunity" for the buyer and seller to negotiate on the purchase price.
It's fairly common to "split the difference," but my client felt she had already given plenty of discounts. Through initial price negotiations and inspection repair issues, she had already agreed to lower the price by $13,000. We had lots of logical arguments for why the home was worth more than the appraiser thought it was, but in the end it came down to how badly the buyer wanted it. We settled with my client giving another $2,000 discount and the buyer purchasing the home for $8,000 above appraised value. Thankfully, he had a large down payment, so the lender did not baulk.
The problem with appraisals is that they only look at where the market has been and not where it is going. They are based on comparable sales in the previous six months. But home values are rising in Boulder County. With more home buyers than last year and fewer homes for sale, the good old law of supply and demand dictates that prices will inevitably rise.
In my example, the home was in Lafayette, which had seen a 10% increase in average home sale prices in the second quarter of 2012 versus the same period of 2011. When you think about it, if buyers only ever paid appraised value, which is based on the past, then home values would never be able to rise.
In the end, my client sold her home for much more than she had expected to when she first decided to sell nine months prior; the buyer got a home he loved and that he could afford; and area appraisers now have a good comparable sale to use on future appraisals.
If you are thinking about buying or selling a home, be sure you have a Realtor who understands where the market is going and who can help you negotiate over the many hurdles along the way. Feel free to contact me anytime through my website: www.moniquecole.com.
