Archive for the ‘Appraisals’ Category
Tuesday, May 16th, 2017
Appraisals are causing problems again for buyers and sellers for the first time in many years. Many appraisals are not coming in at value, despite comparables that support contract prices, leading to problems between buyers and sellers.
Prices have come up quite a bit in many areas in the last few years, San Diego County included. That means that when an agent goes to list a home there are usually comparables to support a higher price. But I keep hearing stories about homes that are not appraising, and it just happened to my buyers as well (even though the offer we wrote and had accepted had comps that supported our price).
So what is a buyer or seller to do if the appraisal does not come in at value?
1. Renegotiate. The first thing to do is to try and renegotiate the contract price. I had a home that appraised $8,000 under contract price (which was completely ridiculous given a smaller home had sold for more just months before). We tried to get the seller to drop the price to the appraised value, or at least meet us in the middle but he would not. He had received multiple offers and there were buyers waiting in the wings who would still move forward with the higher price.
2. Buyer contributes the cash difference. This means that the sales price will remain the same, and the buyer will have to put the difference between it and the appraised value on the table (come up with more money) in order to close. The bank will only lend on the appraised value, but this option allows the buyer to move forward and purchase the home.
3. Challenge the appraisal. This can be done only when there is information that the appraiser did not take into consideration that could alter the evaluation, such as comparable homes that were not reviewed, or maybe a comparable sale that closed immediately after the appraisal was issued which had a higher price, or a sale that closed which was not on the MLS. Or, there may be upgrades to the home of which the appraiser was not made aware. But a challenge needs validation, so the fact that parties do not agree with the appraisal is not a reason for a challenge.
4. Cancel the contract. This is the buyer’s right when an appraisal does not come in at contract value. However, it is important to take into consideration the status of the market – if inventory is low and there is a lot of competition it may be smart to stick with the sale, since getting another contract accepted could be difficult and the buyer could wind up paying even more money for the next opportunity.
In my buyers’ situation they decided to stick with the contract price (after the seller would not negotiate) and pay the cash difference. Since it was only an $8,000 difference this was the smart choice, as they ended up with a beautiful home that likely would have sold for even higher than their contract price had they canceled.
It is important to discuss options with your real estate agent and tax adviser or financial planner if needed. Every situation is different and buyers have to feel comfortable in their decision. But it is tough out there in certain price ranges for buyers right now, and inventory is low, so oftentimes it makes sense to stay the course.
Thursday, April 13th, 2017
If you are a listing agent or a seller who has hired an agent to sell your home, this is an important rule that is often ignored by agents – and it can cost home sellers a sale. It is not written down anywhere and is not required, but it is necessary in order to assure smooth closings. What is this rule? Listing agents must prepare reports for appraisers.
As long as I have been listing properties I have been preparing reports for appraisers. The appraiser, who is sent out by the buyer’s lender to evaluate a property that is in escrow, may not know the neighborhood well or even be from the immediate area. He or she also may not understand why a similar home sold for more or for less. Since the buyer’s agent is not allowed to communicate with the appraiser it is in the best interest of both parties that the listing agent take this advice to heart and come prepared.
I have had many appraisers tell me that they did not need me to meet them at the property or prepare anything, but I still do both and I have to say that almost all of them end up spending at least a few moments at the end going through my report with me.
Here is what I include in my appraiser reports:
1. A brief but concise analysis of all comparable sold properties – usually within the last 6 months, comparing and contrasting them to the subject property. I also let the appraiser know if there were multiple offers, as this can attest to the fact that many thought the property value was accurate.
2. A list of any upgrades or improvements in the subject property
3. Analysis of any pending sales, including prices I can usually obtain from the listing agents to help
4. A comparative market analysis sheet that lists all the comps and the pending subject property
5. All relevant listing sheets (for each property analyzed)
6. Any relevant sales statistics graphs for the area, and
7. A listing flyer
I have never had a listing that did not appraise.
Every listing agent should be sure to include this report as one of their duties. It is the duty of a listing agent to represent their sellers to the best of their abilities, and this simple step – which usually takes about an hour (more for tricky comparable listings) could make a difference in getting the buyer and seller to closing.
Friday, March 3rd, 2017
Home buyers these days have many hurdles to jump through in order to finally purchase a new home, from finding a home, to making an offer in possible multiple offer situations, to actually getting to closing without other issues. One such issue is appraisal – with inventory so low and prices climbing to meet demand it is not out of the ordinary for an appraisal to come in on the low side. But have no fear – there are a few things you can do to keep the sale moving along.
1. Renegotiate price/ compromise. If the home does not appraise there is always an opportunity to renegotiate price with the seller. Either the price can be negotiated down to the appraisal price, or the buyer and seller can agree on a compromise (for example, if the appraisal comes in $10,000 under contract price the parties can split the difference – buyer pays $5,000 more in cash and seller lowers the price by $5,000). However, if the seller had multiple offers there may be another buyer willing to pay that high price just to get into contract, so sometimes a seller will not renegotiate. It is always worth a try though, because if the other potential buyers are getting loans the seller could wind up in the same position.
2. Pay the difference with cash. Lenders are only concerned with the appraisal only because it affects the borrower’s loan-to-value ratio. The lender will only make a loan based on the contractual amount or appraised value.
3. Seller can carry a second loan. If you cannot lower the price and the buyer cannot pay cash over appraisal value, the seller can offer to carry a small second loan to make up the difference. The problem with this is that often the interest rate is higher than normal, but you can negotiate with the seller
4. Challenge the appraisal and ask for another to be ordered. Depending on the type of loan the buyer is obtaining this can be a possibility. If there is a good reason to challenge the appraisal with a conventional loan, say the appraiser was from out of the area or did not know the reasons why comparable properties sold for different prices (maybe your home is highly upgraded or has a better lot or view, etc.), then the appraisal can be challenged and you can ask for a second appraisal. Make sure that you provide comparables and an analysis of their sales to the new appraiser or to the lender – a job that the listing agent should have done (but even if s/he did there could still be other issues that did not bring in the appraisal value to the contract price). Talk to your agent and mortgage professional and figure out a plan that works best.
5. Cancel the sale. If there are no other options available the buyer has the right to cancel the sale without losing any deposits (unless otherwise agreed in the contract).
The bottom line is that there are potential solutions if your appraisal does not come in at contract value, so don’t panic. Make a plan with your agent and mortgage professional and see what you can do. Most of the time there will be a valid solution.
Saturday, January 17th, 2015
Appraisals are getting “tighter” and soon even more deals could begin crashing as buyers and sellers haggle the run up in asking prices. Understanding ( to an appraiser) your listing is simply a $500 appraisal fee, to you it’s a 3-6% commission; so by being proactive you will minimize the risks of losing large commission checks !
Quick Background on Appraisals
Dodd-Frank created a standardized federal licensing process for loan officers (“L/O’s) and appraisers. All appraisals must be performed by an independent third party (“arm’s length”) appraisal service.
The appraiser’s job is to inspect the property, compare it to similar (sold) properties, in closest proximity (up to one mile) and in the most recent time frame (up 6 months). The appraiser uses mathematical formulas (primarily price per sq. ft.) to derive a market value. Pretty straight forward, until we get to amenities -then it becomes very subjective. One appraiser can value a fireplace at $8,000 and another at $15,000 or a view at $35,000 and another at $100,000.
There is no effective way to determine which appraiser is most accurate.
What Agents Can Do
If the appraisal is going to be “tight” there are actions you can take:
1. When the appraisal is ordered make sure the loan officer lists you as the only “property access” contact. If the home is vacant, take off the lock box (and enter that notation into the MLS). This guarantees the appraiser will call you for access to the property. Meeting the appraiser at the property is an opportunity to present the most up to date comps.
2. If it feels appropriate, walk the appraiser thru the highlights of the property.
3. Be friendly and helpful but NOT pushy!!! Appraisers are very sensitive about pressure to “hit the value”.
4. Are there listings currently closing? Call the other listing agents and get info on when they are due to close. Better to delay the appraisers’ appt. until another home (with a higher value) closes a day or two later.
5. Don’t rely on the MLS, call your title service (daily if necessary) to check on a pending recording. As you know: It’s not unusual for MLS data “to lag” several days!
6. FHA and VA appraisals often focus on more on “minutiae” than conventional Fannie/Freddie appraisals. Minor repairs ( i.e. leaky faucets – missing lite bulbs-etc) can require an appraiser to come out for a 2nd time to “sign off” on the completed repairs) and delay your escrow’s closing by days/weeks and add several hundred dollars to the buyer’s costs. So be prepared to (pre) employ a handyman to fix small items (In reality, buyers will want many items repaired anyway).
This helpful article was written and reprinted with permission by Dan Dobbs. You can visit his website at http://danieldobbs.org/ I felt this was a great article to share it because it provides great information to agents and sellers alike, which can help make sure all is done to assure a successful appraisal.
Monday, June 3rd, 2013
Many real estate markets across the country, including here in San Diego County, are currently experiencing seller’s markets, due to low inventory levels and increased demand for homes. Many homes receive multiple offers and are priced over neighborhood comparable sales values, and there are also many situations reported where buyers will remove appraisal contingencies in their offer (meaning they are willing to pay any value over the appraised value so that their offer has a higher chance of getting accepted).
With higher sales prices in many neighborhoods it is hard to make sense of the comparable sold properties, which may show values that are lower than the asking price of a home that buyers want to purchase. It is often difficult even for agents to counsel buyers on how to handle some situations, because no one wants to see her buyer overpay for a home, but at the same time we do not want to see our buyers lose out on home they love. What should buyers and their agents make of all this, and how do they know what to offer in order to get their offers accepted?
1. Comparable sold properties. Obviously the first place to start is with the comparable sold properties. If there have been recent sales in a neighborhood the task of coming to the right sales price is easier, because one usually will see an upwards trend in prices over the last several months or since the start of the year. As agents we really have to compare the recent solds to the subject property to see what similarities and differences the properties possess, then we need to balance them out and add on for price increases. Sometimes this is not as easy as it seems though, and we really need to dig in and do our homework.
For example, on a recent listing we asked for a price over comparable sold value in the neighborhood, but we knew there were a few homes pending in there for prices higher than what showed on the MLS, and those homes were never placed on the MLS, so the appraiser would not have seen them pending. We had to explain this to both the buyer and the appraiser. So sometimes you have to go beyond what is listed in the MLS and have a title representative pull listings that are being sold by owner or by out-of-area agents who might not have put the home on your local MLS.
2. Area Increases. If there are no recent sales in the immediate area, and no recently sold similar properties nearby, then the focus should be on older sales, taking into consideration price gains in the area or in the county. If you can show that prices have increased substantially in the area, say 10%, yet cannot find comparable sales in the immediate neighborhood, you can still apply the increased percentage in value to the home that you are trying to purchase.
Here in San Diego many areas have increased abut 10% since prices started rising, but there are specific neighborhoods where prices have increased more that that…it is important to get a good understanding of what values are doing in the neighborhood in which you wish to purchase a home.
3. Appraisals. Appraisers seem to be “with the program” lately. At the beginning of the year when prices were just starting to climb, many appraisers were not appraising homes with increased sales prices, or they were making it more difficult for buyers to move forward with the purchase because appraisals were not coming in at value. Now however, there generally are enough recent sales within or surrounding a community that allow the appraisers more room to see the growing values.
If an appraisal does not come in at value there are obviously choices – the buyer and seller can either renegotiate the sales price, or the buyer can choose to pay the difference between the sales price and the appraised value.
It is definitely not an easy task to find value in a home where there are no significant recent sales comparables, but it can be done and you can get your appraisal to come in if you do your homework.
Sunday, March 3rd, 2013
There are many people who feel we are headed toward another real estate bubble. With scare inventory, increasing prices, bidding wars, multiple offer situations, governmental programs falsely inflating prices, and buyers willing to pay over appraised value to purchase a home, it is easy to see why many feel this way.
Today’s market is very different from that of the early 2000s. Let’s look at the differences to determine if a crash is likely:
1. Scarce inventory. The lack of inventory is problematic, and it is the biggest issue amongst buyers’ agents. It has led to some desperate measures on behalf of many borrowers in order to get their offers accepted in multiple offer situations, which are common (see below). Back in the early 2000s we did not have inventory issues. People were selling homes right and left, moving up. The ease at getting loans made it simple for almost anyone with a job to jump into the game and purchase a home. Today’s scarce inventory is definitely driving demand, but there are other factors that prevent the frenzy we witnessed years ago.
2. Tighter lending standards Back in the early 2000s, lenders were heavy players in handing out loans to anyone, even those who were not really qualified. Inventory was not scarce like it is today, and loans were very easy to obtain, with no-doc loans that bypassed employment and income verification – types of loans that are pretty much impossible to get today (unless one wants to go through a private lender and pay a very high interest rate). Today it is not easy to get a loan; even with strong employment history and good credit would-be borrowers have to jump through hoops.
3. Stricter appraisal standards. In the early 2000s appraisal standards were very loose – we saw drive by appraisals, and basically many appraisers were just gold stamping contract prices without deep scrutiny. Today appraisers will not do so, and must adhere to strict guidelines. Prices have increased in most areas, and appraisers do take this into consideration, but it is no longer a free for all when it comes to appraisals. The appraisers with whom I have spoken say they are not 100% caught up with what is happening in the market, and guidelines prohibit them from looking at only the last sale, which may be tens of thousands of dollars higher than other sales in the neighborhood in the last 6 months…thus they have to look at both in order to assess value.
For example, let’s say in your neighborhood 4 similar homes sold in the last 6 months at close to $450,000. A fifth home, also similar to the other four, then closes escrow at $500,000 (there could be many reasons for this – bidding wars, cash buyers, buyers paid over appraisal value, or a government agency could have falsely inflated the price – click here for more information on this.) You decide to list your home now, based on the $500,000 sale, and you do so. A buyer comes along who offers that price, but the home appraises lower. This is because the appraiser will look at all five sold properties, not just the last sale.
4. Buyers paying over appraised value. Many buyers don’t care what the appraised value is, and they are willing to pay the cash difference between it and their loan amount. This has been common in many areas, and is a factor in increasing comparable value. This tactic puts those buyers in the most expensive homes in their neighborhoods (which is never a goal, but what many feel they have to do to get their contracts accepted today). Back in the heyday of the early 2000s we didn’t really see this issue because we didn’t have appraisal issues. So this time around it is the buyers who are driving the prices higher due to the lack of inventory and the high demand.
I believe that we will not see another housing crash, based on the above factors. What I think will happen is that we will see the higher prices and lower inventory for a while, possibly until the end of this year, and then at some point things will level off. Many homeowners who have been underwater (their home is worth less than their mortgage balances) will find themselves no longer so due to rising prices. This will allow them to sell their homes, creating more inventory and less distressed property. At that point prices will simmer and stop escalating, and we will finally see a return to “normal” market trends.
Wednesday, February 13th, 2013
Is Fannie Mae hurting the real estate market? Those following the practices of this government lending giant know that as of late, Fannie has been accused by many in the industry of price fixing and falsely inflating the real estate market. What is going on, and how can this happen at this time, after the housing market is finally on the road to recovery?
The majority of lenders and those who guaranty loans seem to be cooperating recently with foreclosure avoidance, opting for the less painful option of short sales. They claim that not only do they want to ease the homeowners’ pain, but that they do not have a desire to own property, and would rather take a loss sooner than have to go through the foreclosure process – one which has a hefty price tag.
There is one exception to this rule, and real estate agents are baffled. Fannie Mae – a government agency, who along with it’s cousin Freddie Mac guarantees and purchases loans, and owns or controls about 31 million U.S. mortgages – has been implementing some strategies lately that go against this notion, despite statements of intentions to help:
1. Price Fixing? One of the claims expressed most frequently as of late by real estate professionals is that Fannie is engaging in price fixing. Here’s how it works: instead of opting for short sales, it is choosing to proceed with foreclosures. Then, once the home is ready to list, it’s selected agents list the property for over comparative market value, under Fannie’s Homepath program. No appraisals are needed, as Fannie is the largest provider of mortgage credit. Buyers are jumping in and paying over market value for these properties, and are closing escrows.
Initially this looks like a win-win, as the buyers get their home and do not have to go through the appraisal process, and the area comps are raised with the closing of the property at a value higher than any other recent sales, thus increasing comps for the next seller. Sounds good, right? Not so fast.
The downside of this tactic is that the buyers are literally moving into their new homes as UNDERWATER homeowners. Their homes have no equity – they own the most expensive property in the neighborhood because Fannie has falsely inflated the home values. Appraisers will not look solely to the most expensive home that sold, but will include it with the other comps…thus leading to the next problem:
As a result, future sellers will not likely benefit from the most expensive neighborhood sales (for more on this click here.). Appraisers will include the most expensive sale in their analysis, but they will not focus solely on that one sale; thus the next home to sell, even in better condition and with more to offer, will be evaluated by appraisers based on the combination of recent sales. What seller in their right mind, who did not have to sell, would choose to do so in such a situation? This will keep homes off the market, sustaining low inventory levels.
2. Countering short sale offers at prices higher than comparable sold properties. Another tactic that is being used by Fannie when they DO agree to short sales, is to counter offers received higher than comparable sold properties. Again, this is crazy! These homes will not appraise, but still there are buyers willing – and doing it! – to pay cash over and above appraisal value in order to close escrow. Again, these new homeowners move into their homes in negative equity positions. This tactic also prices many homebuyers out of the market.
I’m not sure how to explain what is going on, but it scares me. Our market is healing right now, and if prices are falsely inflated and comparable sold properties ignored, we will see large market increases in short time periods. If you remember, this is what led to the last market crash. Please share your thoughts.
Thursday, May 24th, 2012
There has been a lot of talk lately in the real estate industry about inaccurate appraisals resulting in cancelled home sales. Appraisals have definitely been more challenging, as lenders and their underwriters place strict requirements on the use of comparable properties and of what exactly that can include. Both sellers and buyers have a few ways of helping to assure that appraisals come in at contract value.
Buyer Options: Buyers do not have much say in the outcome of their appraisals, and cannot communicate with the appraiser, but they do have some options when appraisals do not come in at contract value.
1. Renegotiate the contract price. The buyer and seller can renegotiate the purchase price to reflect the appraisal value. Sometimes the seller may not be willing to do so.
2. Pay the difference in cash. If renegotiating is not an option, the buyer can choose to pay the difference between the contract price and appraised value.
3. Negotiate a compromise with the seller. Sometimes the parties can reach an agreement that will allow the sale to move forward. This can include anything from meeting in the middle of the contract and appraisal value, with the buyer laying down some cash to close, to the seller accepting the appraisal value and not contributing to any repairs that were agreed upon, and many other creative options.
4. Challenge the appraisal and request a second appraisal. The buyer can always challenge the appraisal with pertinent additional facts and/or comparable properties that were not considered in the report. It may also be possible to request a second appraisal, which the buyer may have to pay for. Speak with your real estate agent and your mortgage professional to decide how to best accomplish this method, as you must have information that that you feel should have been but was not contained in the report.
5. Cancel the contract. If none of the above options work or are desired you can always elect to cancel the contract. Take into consideration that you have likely spent money on a home inspection and of course, on the appraisal.
1. Educate the appraiser. The most important way a seller can help an appraisal come in at value is to ask the listing agent to prepare a report for the appraiser. In it, the agent needs to review the comparable properties and compare and contrast them to the subject property. It is also important to point out any upgrades or special features the home possesses, like a view or large yard, the fact that it’s on a cul de sac, or even things that may not be obvious, like green features and energy efficient appliances. Include photos of the comparable homes and the subject house, and a list of costs spent on any improvements.
2. Challenge the appraisal. Like the buyer, the seller can always challenge the appraisal with pertinent additional facts and/or comparable properties that were not considered in the report. See above.
3. Renegotiate or compromise: (see above).
4. Cancel the contract. This is always an option, but make sure that you have a plan moving forward. If you are planning on re-listing the property in the hopes of finding a cash buyer or another buyer who will pay the difference, keep in mind that you will likely be required to disclose the appraisal report from the first buyer. If you are thinking of renting the property make sure to crunch the numbers and take into consideration rent amount, property taxes, homeowner association payments and/or assessments, insurance and maintenance costs.
Appraisals, like many home sales, can be challenging these days. Over-improved properties and properties in neighborhoods with multiple distressed sales (that tend to sell for less) are especially at risk for low appraisals. But if you and your agent are prepared and have done your homework, there can be a successful outcome even when an appraisal does not come in at contract value.
Photos courtesy of Dreamstime
Sunday, November 1st, 2009
Did all the complaining work? It appears that the controversial Home Valuation Code of Conduct (HVCC)‚an appraisal system that was the brainchild of Fannie Mae and Freddie Mac and caused much aggravation amongst Realtors, home buyers and sellers, mortgage brokers and appraisers‚may be thrown out the window.
The House Financial Services Committee approved a bipartisan amendment last week that would terminate the Code and replace it with a new set of rules and creation of a new Consumer Financial Protection Agency. The new rules would apparently not be as confining upon appraisers, a problem that caused many property appraisals to come in exceedingly low, which in turn caused many home purchase deals to fall out of escrow.
The purpose of HVCC was to give independence to home appraisers. It created a slew of appraisal management companies, used by many lenders, who would in turn pay the appraisers a fee to work an appraisal. Oftentimes these fees were low and less than appraisers normally made.
Many appraisers were obtained from out of the area, which unfortunately meant that they were often unfamiliar with the neighborhoods in which they were working, AND they sometimes lacked experience (as established, experienced appraisers would not work for such reduced wages).
Furthermore, these management companies would then charge all or a portion of the appraisal fee to the home purchaser, making a nice profit in the end. These factors caused many escrows to be delayed, and others even fell through because the value did not match comparably sold properties.
Over the last several months the National Association of Realtors, the National Association of Home Builders and the the National Association of Mortgage Brokers have been standing behind member complaints to push for changes to the HVCC. It seems to be finally working. If the new rules come into play the housing market should be able to continue on the road to recovery.
Just goes to show you how DOING SOMETHING makes a difference!