You want to sell your home short and your FHA appraisal came back too high. What should you do?
When you decide to sell your home short, especially one with an FHA insured mortgage, you learn quickly that FHA has unique policies that must be followed. The seller or seller's agent works with the bank to submit a short sale package initially. The bank responds with an appraisal request to determine fair market value of the home. An FHA mortgage requires the appraisal be done by an FHA approved appraiser. This small community of approved appraisers typically covers a large area and is likely that the appraiser is not local or familiar with the area around your home. This can present a problem for you as a seller if the appraisal came back too high.
It is most important that you as a home owner or your listing agent meet the appraiser to help influence the appraisal. As you'll see below, the value of the appraisal is the foundation for a successful FHA short sale and should not be taken lightly. Do everything you can to influence a value that you can work with to find a buyer. In a short sale, there are no benefits to the seller for inflating the value of their home. It's actually in the seller's best interest to do just the opposite. Show the appraiser all the issues and problems with the home to bring down the appraisal. Doing so doesn't bring any less money to the seller. Regardless of the sales price, the seller closes owing nothing and getting nothing from the sale. Show up ready to justify a realistic appraisal that you or your agent can use to attract a buyer.
Why is the appraisal so important? Let's take a look at the FHA guidelines that your bank is held accountable to:
If your home sells within the first 30 days of listing your home for sale, the bank can only accept 88% net sale proceeds of the appraised value as-is condition.
If your home sells between 30 days and 60 days of listing your home for sale, the bank can only accept 86% net sale proceeds of the appraised value as-is condition.
If your home sells after 60 days for the duration of the PFS (Pre-Foreclosure Sale) period, the bank can only accept 84% net sale proceeds of the appraised value as-is condition.
What this means is... the higher your appraisal comes in, the less likely that you'll find a buyer for your home. If the appraisal is 12-16% too high, it can completely offset the advantages of buying a short sale for a buyer. Buyers are typically jumping through hoops to get a short sale closed and the carrot that keeps them involved is the equity in the home at closing.
So, what do you do if you met the appraiser, influenced the appraisal and it still came in too high? All is not lost. Try the following:
1. Do you own market analysis and justify your findings of a lower appraisal. Use comps that sold in the area and make standard adjustments to make your point. Keep a log of all showings and feedback at the inflated price. Take pictures of the negative features of the house and explain why the home is price too high. Refer back to the few showings and poor feedback you've gotten. Put a package together and send to the bank to review and then request a second appraisal from the bank. Banks will typically request a second appraisal after 4-6 weeks with proper justification.
2. If that doesn't work, ask the seller to order their own appraisal. Same rule applies... meet the appraiser there and try to influence a lower appraisal that you can work with. Bring comps, show pictures and do whatever you can to bring the value of the appraisal lower. Send this appraisal to the bank and request that they order a second FHA appraisal. If this is successful.... make sure you meet the second FHA appraiser there and once again, influence a better and lower appraisal to attract a buyer.
3. If you've done all that and the appraisal is still too high, you can request a varience from the bank. HUD, as you can imagine has a policy and a form to fill out in the event that there is still a discrepancy. As a last resort, reduce the price to attract a market value offer. Then submit the offer to the bank and request that they submit a variance to HUD and it will be reviewed again. If your offer is accepted, you move forward with a short sale close as normal. If your request is rejected, I would call HUD directly and speak with a representative there to explain your situation and plead your case. A contact at HUD is: Marilyn at 866-449-1661 at extension 8544. Tell them you're selling short and your FHA appraisal came back too high. For additional information about short sales, visit my short sale information center. Contact me with additional questions.
Good Luck, and don't quit!
Tom Braunagel, Keller Williams Realty Partners, 203-268-4994 x3.