Are some of our Sales Associate peers Wolves in sheep’s clothing? I have been hearing from my friends in the business in both New York and New Jersey that there is an unscrupulous pattern of behavior that may be occurring more frequently now that the market is picking up. It is not new but it should NOT be happening at all. I know first-hand how devastating this practice is because it happened to me back in Brooklyn before I knew what I know now.
It is the practice of Buyer’s agents offering higher than the list price to sellers thereby eliminating prospective purchasers with legitimate offers at or below the list price. So the question is why are they doig this?
Now, let’s review some of my opinions in my last blogs regarding listing a home. The simplest way to explain this is that a Realtor will provide free of charge a Comparative Market Analysis (“CMA”) which is NOT an appraisal. It is an opinion (really an educated guess) on what the house is valued at in the current market. The Realtor will base his/her opinion on recent sales of similar type homes in the immediate area. So the CMA is a bellwether of recent market trends. The home appraisal is done by a professional appraiser who uses a number of methods to determine what the value of your home is based on. He or she may use among other things, construction material, age of the home, updated kitchens and bathrooms, a finished basement, internal and external influences, desirability and a host of other things which can add to the value or depreciate the value of the subject home.
So what are some Realtors purportedly doing? They are having their buyers make offers above the list price knowing that the house will appraise for far less. Banks generally as a rule will not finance a conventional loan for more than 80% of the appraised value. This is how the ruse could play out. A home is listed for $600,000. A “buyer” comes in and offers the seller $625,000 knowing that the house will not appraise for $625,000. Naturally, the Seller is very happy with the high offer. The bank’s appraiser comes in and appraises the subject home for sale at $595,000. At $625,000 the loan would have been approved at $500,000, but given the lower appraisal the loan is only approved for $476,000. The buyer and seller are now presented with a few options:
1. The buyer can come up with the extra money for the down payment (an extra $24,000) or possibly walk away from the deal;
2. The seller can appeal the appraisal by presenting information or documentation that might help raise the appraisal. Not likely.
3. The buyer can ask the seller to lower the sales price to $595,000 to meet the bank’s appraisal thus securing a favorable purchase price well below the original offer price.
I experienced this tactic when I was selling my house in Brooklyn 14 years ago. It is devastating because in my case the so called buyer strung us along and then disappeared before actually signing a contract and giving a down payment. In retrospect I should have used my local broker who was also a neighbor and established in the neighborhood but greed and stupidity kicked in. Thankfully I have no first-hand knowledge of this occurring but it is good for everyone to be aware of this tactic. If you are a seller and you get a higher than list offer, make sure the potential buyer will be willing and able to purchase the property even if the appraisal is lower than the offer. A dedicated, enthusiastic and ethical Realtor is invaluable. Not all offers higher than list price are disinegenious, most are probably valid. Bottom line – Seller beware.
Words of wisdom: “Real estate is at the core of almost every business, and it’s certainly at the core of most people’s wealth. In order to build your wealth and improve your business smarts, you need to know about real estate.” Donald Trump, Think Like a Billionaire
The ideas expressed in this report reflect my own personal views and opinions and are for reflection and personal discernment only and should not be relied upon as legal or investment advice. The foregoing report is for information only. No warranties are made regarding the truth or accuracy of this information and I specifically disclaim any and all liability for any reliance placed upon the materials that are here published. Always consult your lawyer for legal advice in matters of private or business importance. Nothing published in the Monti Real Estate Monitor should be construed as investment advice or as a solicitation to buy or sell any kind of financial instruments or Real Estate.