Handling an Appraisal Gap

I think that I can safely say that most homebuyers are going to finance some portion of their purchase with a home mortgage. There are always those special circumstances where someone might not, but by-and-large there’s going to be a mortgage lender involved.

First, it’s important to remember that the bank and the lender are looking at the purchase of a home as whether or not it is a good investment. A buyer may have been preapproved to purchase a home up to $400,000 but that doesn’t mean that the bank will lend you that money on just ANYTHING. They want to ensure that the home you select is worth what they’re lending you because if you default on your mortgage the only thing the bank is really going to get is ownership of the house.

With the current market factors of many more buyers than homes available to purchase on the market, prices should increase, but oftentimes bank-perceived values don’t increase as fast as a potential buyer would like. It’s because there’s an inherent flaw in real estate valuation: the flaws of historical data.

When a borrower selects a home the only way to get an idea of what the home is “worth” is to look at recent closed sales in the area. No matter who is doing the estimate of value we’re all looking for the most-similar homes within a close proximity, but the variable that we can’t correct for is that those homes were sold weeks or even months ago. A lot can happen in the market in the matter of a few weeks, so putting in an offer can contain some risk. Basically, is the lender going to see the value that the buyer sees in the home when looking only at historical (outdated) data points?


For example, if the lender deems the value of a house to be $280,000 then the bank will only lend up to 280,000 on the purchase of that home. It doesn’t matter if the buyers were originally approved for much more, and it definitely doesn’t matter if the under contract price is higher. The bank isn’t going to budge on their value calculation (usually).

In this example let’s say that the buyer is under contract on the home at $300,000. There are some options, but none of them are particularly fun. First, the buyers and their agent can argue the appraisal. For this to go anywhere the agent better have historical data to back them up, and it better be undisputable and unbiased. Basically if there’s a sale in the neighborhood that you know about that wasn’t taken into account in the appraisal report and it sold for more and was very, very similar to the house you’re trying to buy, you submit that sale for consideration by the lender’s team. Again, it’s making an argument based on historical data.

What’s more likely is that the buyer has to figure out a way to cover the difference between the appraisal price of $280,000 and their under contract purchase price of $300,000. This means that the buyer needs to have $20,000 in cash available that they were likely not anticipating needing to have. And this is in addition to the money they need for the downpayment for the lender on a $280,000 value of home and the closing costs (escrow funding needed, fees paid, attorney costs, etc.)

If your lender approved you with a certain percentage of purchase price as down payment (for example, 20%) ask if they can approve you with less money down. The difference in the downpayment required can then be allocated to the appraisal gap. This could mean that you’re now going to have to pay mortgage insurance interest (MIP) so make sure you have a full understanding of how this will impact your mortgage payment and the fees that you pay each month.

If you are very-very lucky, you may be able to structure receiving a financial gift from a family member to help with financing your home. Make sure that you discuss this possibility with your mortgage lender as there are documentation requirements and they are extremely detailed. Basically, you do not want a financial gift to need to be repaid as this would mess up your debt to income ratios and could make it impossible for you to qualify to purchase the home. There will likely be a requirement that the person giving the gift signs a gift letter stating that the money does not need to be repaid. The person giving the gift should also consult with their tax advisor prior to making a financial gift.

Lastly, if the appraisal comes in low you can go back to the seller and ask them to drop the purchase price to the appraisal value. This used to work, but in our current market it’s not a great option. Most buyers are willingly offering more than they think the home will appraise for and will therefore waive this option as part of their original offer. It’s more likely that the seller will want to put their house back on the market and get someone to waive the appraisal contingency up front than to lose potentially thousands of dollars by dropping the purchase price down.

Home is where we heal

Everyone is dealing with problems that they don’t readily show to the world. I have lived the last two decades as the sibling of someone struggling with addiction and it has shaped me in so many ways. It has also shaped how I see “home” and how I feel comfortable and relaxed.

If your home has always been your haven, then I must say that I envy you. Growing up alongside addiction has (at times) stolen away the space that one is supposed to feel their most relaxed. In my life, evenings at home could be peaceful or volatile and it was anyone’s guess which would unfold. That is the nature of the struggle of living amongst addiction. No say, no control, just your reactions and your reactions to other peoples’ reactions.

I didn’t understand what home was supposed to be until I purchased my own. There are so many people that I’ve seen take that same deep breath when they walk into their new home as their own space where they can heal from all of the things that have hurt them. Some clients are upfront about what may be going on, and some are not, but the sigh of relief after closing is unmistakable. The walk through the door signifies a weight being lifted, stress being released and the deep understanding that someone is safe in their new home.

Having a place to heal, to grow, to experiment and to express your creativity is more than just comforting, it should be a basic human right. Creating your own safe space is empowering and deeply transformative. It allowed me to learn the importance of emotional and spatial boundaries, and how to build and maintain them with those around me. Once you learn to create your own home, you will fight anyone and anything that tries to destroy it. Home becomes a place of strength, of healing, and a place to build hope.

Real estate is more than walls and windows, it’s helping clients to create their own safe space. I can say from very personal experience that our home is where we heal and I’m so thrilled to spend my days helping those around me to find their space.

Is now the time to… downsize?

As children grow up and move away their parents are hesitant to sell the house that their family has grown up in. The memories are hard to part with, but the house simply isn’t working for them anymore. Add that with the fact that this market has scared the heck out of everyone and there are some empty-nesters that are potentially missing out on an amazing opportunity to grow their wealth, upgrade their living space and live authentically to their current stage of life.

This market shouldn’t scare you, it should invigorate you.

The opportunities that you have are abundant. Receiving more for your home than you ever thought possible opens many doors of possibility to you. What could you do with an extra $40,000 that you weren’t expecting from the sale of your home and not having to make any costly repairs to get your home sold?

Pay off debt? Plunk more money into your retirement savings? Retire now instead of a year from now? Travel the US in an RV? Move to Costa Rica? Backpack Europe while staying only in luxury hotels because you’ve earned it after decades of corporate work? Whatever it is, you do you. Dream your biggest dream and watch the sale of your home carve out the first steps on your next great adventure.

Deciding to sell your home is a big decision, and it could be the start to an even bigger new chapter in your life. Need some additional information on the process or what you could net from the sale before you decide to move forward? I’m happy to help you however I can. A valuation of your home for today’s NC/SC market is always free, and I’m always happy to answer questions over a cup of coffee either in-person or virtually. So call me to get the information that you need to make the best decision for yourself.

How are Realtors actually paid?

It’s the question that everyone has, but they’re too afraid to ask… How are you paid?

I’ve been waivering back and forth on how much I want to reveal in this post and I’ve settled on discussing the mechanics of agent compensation, along with a general personal discussion. It’s important to note that every real estate agent runs their business a bit differently. Much of these differences hinge on personal values and what someone will or won’t do or accept in their business dealings. There will always be someone that is willing to work for free, it’s up to clients to decide what the value of having a knowledgeable agent representing them is and negotiating compensation accordingly. There are good real estate agents and there are bad ones, and we all have our war stories from our time in this career.

Before I move forward in this discussion it’s important for me to CYA from a legal sense and say that everything is a negotiation. If you are hiring someone to do a job for you or represent you in some capacity you need to come to an agreement on compensation with them first and foremost. There are no hard-and-fast rules here, so make it a discussion.

Generally, in a residential transaction the seller’s agent and the buyer’s agent are both compensated by seller. Both the seller and the buyer come to an agreement with their respective representative on compensation, but that fee is generally then covered from the seller’s proceeds from the sale of the home.

The seller decides what they are willing to pay for both their listing agent and for the services of a buyer’s agent in finding and bringing forward a qualified buyer before listing their home. For example, the seller offers to pay 6% of purchase price with 3% going to the listing agent and 3% going to the buyer’s agent. If the buyer’s agent has an agreement with their client for higher than 3% compensation it would be up to the agent to get the additional amount paid to them from the buyer. If the seller only offered 5% of purchase price they could split the compensation 2.5% and 2.5% or they could pay their agent 2% and the buyer’s agent 3%. It’s really however the seller wants to set it up and they discuss this with their agent as part of the listing agreement.

There are some things to keep in-mind if you’re the seller who is deciding compensation. Aside from the normal adage of “you get what you pay for” when it comes to your own representation, if compensation is too low for the buyer’s agent 1) you’re putting the buyer in a tough situation to fund the difference for their representation during an already costly financial transaction and 2) agents may decide not to present your home to their clients. I’m not going to debate the ethical implications of steering a client away from a home for the agent’s personal financial gain. I’m just saying that it’s up to each agent how they choose to run their business, and no, I do not agree with where everyone lands on the ethical spectrum.

With compensation often being a percentage of purchase price, that does mean that higher-priced homes come with higher commissions than lower price point homes. This does not mean that higher price-point homes are more difficult to sell, in my experience it is actually quite the opposite. A $100,000 home is oftentimes much harder to transact because the buyer and seller have less money available for things like repairs, there’s more first-time homebuyers at lower price points and there can be agents who don’t want to deal with lower priced homes.

When closing a higher-priced home, what ends up happening is that the bump in commission dollars ends up helping to float time and expenses spent working on lower price point transactions that need more of my time and attention. It may be because there are more nuances within a specific transaction, more legal hurdles, or simply because a client needs more time to talk through ideas or need to view more homes with me before they’re sure of their decision.

It’s also very natural within the real estate business to spend time working with clients that aren’t ready to buy for whatever reason. Because an agent is only paid if a transaction closes, there are many hours spent meeting and working with clients that simply won’t close. Believe it or not, there are costs associated with showing homes to someone who doesn’t end up buying or selling a home with you in time spent, along with wear-and-tear on your car and the necessary gasoline to get from place to place.

The commission number that you see on the closing statement does not go directly into the agent’s pocket. There are splits to pay to the brokerage firm and any team that an agent may be affiliated with. Then money hits an agent’s bank account, where they must set aside money for their own income taxes and self employment taxes, along with their costs of doing business (insurance, advertisements, supplies, car, office, etc).

Each agent is their own small business owner, so all the risks and rewards of being in business for yourself apply. Sometimes it can be lucrative, sometimes your expenses far outweigh your income, but it’s always worthwhile work if you love it.

Why New Construction is Your New BFF

Prices are high, inventory is low and offers in the market are walking a fine line between homebuying and becoming a Vegas-level professional gambler funded only by your life savings. To say that the market is crazy feels a bit like an understatement these days and Covid has compounded the issue. I’ve seen Realtors take keys out of lockboxes to keep homes their clients are interest in from being shown (that’s a great way to lose your license), and I’ve had a Realtor enter without having scheduled a showing (another way to lose your license) which is technically trespassing and a great way to make the seller really, really angry. So as the buyer, how do you stay above the fray?

Two words: New Construction.

While it can be fraught with it’s own set of difficulties, new construction is a great way to keep out of the trenches of full-out real estate warfare known as the multiple offers situation.

Working with a builder means working with a company so they’ve got a plan to handle roll outs of lots and floorplans. They are held to a higher standard than a residential seller and must abide by equal housing opportunity laws. This means that a kindly worded love letter to the seller are off the table for tactics to win a home. The builder usually has an interest list and any newly available properties are offered to those on the list using a first-come-first-served basis. There’s no way to buy your way to the front of the line and sales staff are salaried meaning that their ability to take a shady financial incentive from a homebuyer is essentially zero.

Furthermore, because the sales staff is a step removed from ownership, they have no incentives to select buyers planning to build more expensive homes. As long as the lot is sold and a house is built, then the sales staff is happy whether the ultimate price of the home is 400,000 or 550,000. Meanwhile, if it was a seller selecting offers there’s a clear winner in that race.

Buying new construction also means that there’s more than one home for sale, so if your first choice of building lot happens to be scooped up, there are still other options for you. If you miss out on a re-sale home there is no true backup plan and your house hunt begins back at square one after losing the bid.

With new construction homes and especially those built by larger companies the pricing is more streamlined. It doesn’t always feel like that when you make what you think is a small tweak in the design showroom and it hits your bottom line hard, but it’s true. Shifts in pricing take a while to take effect in larger companies, so their pricing for an equivalent home on the resale market can actually be substantially less. Also, with multi-state builders pricing is often calculated for an entire region, so whether you’re in a big city or a more rural location you won’t see a tremendous jump in the price to construct a home. The majority of the pricing difference is due to the cost of the land itself and not much else.

Getting on a builder’s VIP list can feel daunting because there might be a ton of names on the list ahead of you, but try not to worry. With so many people looking for homes it’s easy to see a really large interest list but then because of the time required to complete the construction process the majority of those who were originally interested either found a home by other means or decided to exit the homebuying market all together. A lot can happen during the time a community opens and a certain home is ultimately built, so try not to feel discouraged.

If you’re sick of getting beat out in multiple offers, you don’t have a ton a money to put down on a house, or you have a difficult form of financing, then it’s time to look at new construction to see what options might work better for you!