I am an REO Broker here in the San Francisco Bay Area. Inventory in our market is pretty low so whenever I list an REO I receive multiple offers. I listed one in San Jose recently; priced at $472,900. I got 8 offers for it, the highest of which was $551,000. One of my agents suggested to me to compel the buyer's agent and his client to sign an addendum that if the home did not appraise then they'd have to come up with the difference. I made that clear to them.

A few weeks later, I received an email from the buyer's agent, with it was attached the appraisal report. Apparently, the agent was dumbfounded by the appraisal. I was furious, to say the least. The guy had appraised the property at $459,000. That's a whopping $92,000 below the offer price. My BPO had the price range of between $525,000 and $550,000.

At first, I presumed -- wrongfully so -- that the buyer's agent had connived with the appraiser to cheat. I called the agent and expressed my fury. He said he had nothing to do with it. The appraiser wrote back to me and stated that a new law prohibits any contact between agents and the appraiser.

I had spent 2-3 hours studying and rebutting his appraisal. The guy had pulled comps from a new subdivision which was being dumped by a developer. All the sold comps as well as the active comps were from that hopeless subdivision. They were all short sales. The homes had tiny lots and HOA fees. Mine had a 5000 sq. ft. lot, no HOA fees, it's just across the street from a park and walking distance from a school. One buyer, a Registered Nurse, had made an offer to buy the home for $553,000 and begged me to let her have it. She made excellent money ($16K a month) and had been approved by BoA for up to $715,000. She worked in the area and her son went to school there. We had accepted the $551,000 because it preceded her offer and we'd verbally agreed to accept the one we went for.

Moments after I received the appraisal from the buyer's agent, my reaction was to cut out this buyer and go with the RN instead. I emailed the agent to that effect and warned that if he was not forthcoming then I would have no choice but to do so.

In my opinion, the appraiser was dumb, pardon my French. There were properties listed in the neighborhood where my subject was located, one on the same street was pending. A good appraiser would have contacted the listing agent to find out how much the home was pending for. That home sold for $555,000 and closed escrow on 7/2/09, 7 days after the appraisal report was done. A good appraiser would have made an effort and inquired about the pending sales. Another home came on the market on 7/4/09, just 2 doors down from mine and was listed for $599,000. This was a regular sale, not an REO, and it also received multiple offers. It had the same specs as mine.

We all know that a house is worth what buyers are willing to pay for it. Period. If buyers are willing to pay $551,000 and up then that's what the home is worth. After all, we live in a free market. Values have fallen partly because buyers are no longer willing to pay 2005 prices for these homes. This particular home was bought back in 2005 for $750,000. Buyers feel they are getting a bargain if they get it for only $551,000 or so.

How Did I Resolve This Issue?

Remember I mentioned that I had compelled the agent to agree to come up with the difference if the home had appraised for less? That's exactly how the issue is being resolved. I had advised for the appraiser to review his report and include the property that had sold on 7/2/09 for $555,000 and the new listing going for $599,000. Apparently, he would not do it. The buyer wanted to stick with the same lender, and that being the case, he had to come up with more than the 25% he'd initially indicated.

Bottomline: Ensure that you have the buyer and his agent sign that should the appraisal come in lower than the offer price, the buyer will have to make up the difference. This is imperative especially in multiple offer situations. This is not the first experience I have had with appraisals coming below offer price, so to be on the safe side, have the buyer sign the addendum.