Monday, June 30, 2008

Appraisal pains...

Pretend you are the seller of a fine home. You've reduced price multiple times on your quest to find a buyer. Success!! Sort of anyway. A buyer makes an offer... it is too low (you think) and after a few rounds of negotiation via counter offer forms... you settle on a sales price you never would have thought you'd accept.

The buyer is NOT paying in cash, which means the buyer is working with a lender to borrow the needed amount to meet the terms in the agreement (think sales price).

Before you call that moving company... take the following into consideration.

This comes from the BloodhoundBlog (and they just turned two years old, so happy belated birthday to Greg, Cathleen, and the rest of the very fine contributors of that great site).

I ask that you read the whole thing, but I'm gonna share the information that should scream out to you below from that post.

You probably won’t sell your home for an above-market price, but even if you do, the home still has to appraise for that price

Catchy title, eh??

So your house is finally under contract. Congratulations. It took longer than you thought it would to sell, and you had to go through three price reductions before you got regular showings. But now you’re under contract and in escrow. You’ve made it through the inspections and you’ve taken care of all of the repairs. Nothing but smooth sailing from here, right?

Not quite.

Here comes some bad news you hadn’t anticipated: Your house didn’t appraise.

I can tell you from recent professional experience that appraisals are not coming in for even the agreed to price on the contract you worked so very hard through lengthy negotiations. Here is more...

A lender will only lend on the appraised value or the purchase price — whichever is lower. If the appraisal comes in lower than the purchase price, something has to give.

Greg goes on to say that a buyer is protected in most contracts in the sense that if a house and/or property do not appraise, the buyer can simply cancel the contract and receive their earnest money back. Thanks for playing.

Or... the buyer can ask the seller to reduce the sales price (once again) to the appraised value (subject only to the appraiser and how he or she feels that day). If it is only a few thousand dollars it might not be all that bad and the seller may do it... but what if it is an additional ten thousand or twenty thousand?? Again, normally, thanks for playing.

The lender will not underwrite the loan, so the buyers will be forced to cancel using the financing contingency.

You could end up waiting quite a while longer for another buyer. And that buyer could offer you quite a bit less for your home. And even then, your house will still have to appraise for the purchase price. If home values continue to decline, you could live through this same nightmare a second time.

Again you are pretending to be the seller on this one. And if you've been a seller recently that has been given a low appraisal, it is a nightmare. Sometimes the appraisal report does not get finished in a timely manner... other times it is possible that the underwriters are slow to give final determination on the status of whether or not the loan is a go. It is more than possible that, as a seller, you are given the bad news of the low appraisal with about a week to go before scheduled closing. Yeah... a nightmare.

Appraisers and loan underwriters are skittish right now. Lenders are taking back homes and selling them for fifty cents on the dollar. Appraisers are being fastidious to make sure they are not overestimating values.

There are three check boxes on a typical appraisal form that speak to the current state of the market on the form. The options listed are the market is: 1) appreciating, 2) stable, and 3) DEPRECIATING.

On the most recent appraisal report that I've actually seen with my own eyes here in the Kingman area... option number three was checked (you shouldn't be shocked). This is a big indicator that underwriters watch closely when making their determinations. As a buyer or seller, at this point you are powerless to the appraisal form.

Once you get the bad news about the low appraisal... you are free to search for other comparable sales. You may even find a few sales comps that did not make it on the appraisal report that show sales data that point to a higher value. It probably will not matter. Not in this market. Not with all the eyes of the various government agencies out there looking for something that can be considered 'unscrupulous' (even though the buyer and seller agreed that the value of the home was the amount listed as the final sales price).

The buyer will probably cancel the contract... or at least extend the close of escrow period so that they can find a different lender and start the process all over again. With values dropping monthly, chance are that the next appraisal will be in line with the first one.

Fun huh??

And all of this is just another reason to price your home to the market. You probably won’t find a buyer willing to pay an above-market price. But even if you do, the home still has to appraise for that price.

So, once again, are you sure you really WANT to sell?? I can understand the NEED to sell, but if you fall into the NEED to sell group then I suggest following the advice I emphasized above. You are not only competing against other sellers in perhaps similar circumstances as your NEED indicates, you are also competing with foreclosed on property that banks are maybe getting $0.60 cents on the dollar for. You might want to think three or four months into the future as well. What will the property market value be then?? Will today's listed price even appraise in 90 to 180 days??

Tomorrow is the day that I'll share the listing report for June. I'm going to include a new data figure. I'll report how many new listings are of the foreclosed flavor. See you then.

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