What if my appraisal comes in low?

appraisal2It has been known to happen.  A seller puts their house on the market.  A prospective buyer makes an offer.  The seller accepts it.  Now the real work begins.  Next come the inspections, physical, pest, HVAC, roof, pool, etc.  And if the buyer is getting a loan, the most important one of all…the appraisal!

What is an appraisal?  Well it is basically how the lender determines if the home is worth what they are being asked to loan.  But it’s more than that.  The appraisal is an opinion of value at the given moment.  Huh?  You see, appraisals can change on the fly based on what the market is doing.  As an example, let’s say your appraisal came it at a value of $480,000, and that is what the accepted offer was.  Great we have a deal.  Now let’s say the next day the exact same floor plan closes at  $500,000.  There is a new baseline established and the buyers just benefited by having the equity rise by $20,000.

But what happens if the appraisal on that $480,000 offer came in at $460,000?  The lender is not going to loan on a property that they feel is not valued at the agreed upon sales price.  In essence the seller has to sell the home twice, once to a buyer and then to the lender.  So now a renegotiation between the buyer and seller takes place and typically there are a few outcomes that happen.

  1. The seller can lower the price to the appraised value.
  2. The buyer can agree to pay the difference and bring in more cash.
  3. The buyer and seller can split the difference.
  4. The deal can be cancelled and everyone goes their separate ways.

If an agreement cannot be reached, and the contract included an appraisal contingency, meaning the home had to appraise at the agreed upon price or higher, the buyer can cancel and get their deposit, if any, returned in full without penalty.  It’s also important to remember that an appraisal is an opinion of value in a given moment.  So if a seller had an appraisal done say 3 months ago, the lender will not accept that and will still have an independent appraiser go out.

The last thing to consider is that depending on the type of financing the buyer is getting, the appraisal could be more detailed.  As an example, if the  buyer is getting an FHA or VA loan, the appraiser may “call out” things like chipped paint, structural issues, mold and the systems in the home.  If you are thinking about selling, you need to understand how the financing terms you will consider could affect the appraisal and ultimately the sale.  So it’s not just about price, consider what types of terms will be acceptable to you.

 

Hell…Just sell!


Sorry to use profanity in the title. However with the news that the median home price in San Diego county has gone over $600,000 for the first time ever, it might make sense to just put that damn place on the market and roll the dice. What we have here is what’s known as an extreme sellers market. Of course the flipside is, “What will you buy”. For the right price maybe it doesn’t make any difference!

In all seriousness, if you have been thinking about maybe downsizing or moving to a different area in San Diego, you should take a serious look at what homes are selling for in your neighborhood. If you can maximize your net income at close of escrow, downsize, and buy something smaller that suits your current lifestyle, that could be a really good decision. Heck who wouldn’t want to live in a nice little condo in Little Italy?

There are also several areas in San Diego where listings are more abundant. Maybe considering a small coastal community, someplace like Imperial Beach, where values are still good relative to their location to the water. The other option might be looking toward East County, where the day begins and the sun rises. Often you can find postwar, suburban homes in neighborhoods that are easily walkable, kid and pet friendly, and close to all the amenities you need. You might want to check out neighborhoods like North La Mesa, San Carlos, the College Area, or even Del Cerro and Allied Gardens.

If you’d like more information on any of these neighborhoods or others, or if you’re looking to get the value of your home in today’s market, please contact me today and I’d be happy to send you a free and detailed analysis so you know exactly what is going on in your neighborhood.

Real Estate War Stories…Part 1

What if you knew the answer to the most often asked questions when it comes to buying or selling real estate?  Would that give you an advantage and help you make better decisions?  Of course it would!  Well that’s exactly what I want to do for you…share all the best questions and answers.  Along the way I will also provide insight on the top pitfalls and how to avoid them.

Look, real estate is a tricky proposition and no two transactions are alike.  Even seasoned agents come up against things they have never experienced from time to time.  I’ll get it started and I’ll ask you to contribute by asking me anything about real estate you’d like.  I’ll share those in future posts.

Question #1:  What is the first step I should take when buying a home?  

Surprisingly, I get this from both buyers and sellers who have to sell before they buy.  And depending on where you are, the answer can be different.  The simple answer is to contact a Realtor who can help you get started, however it goes deeper than that.  If you are a buyer I would suggest you contact a mortgage lender who can start the pre-approval process and help you understand how much you can afford, what down payment options exist, and what your monthly mortgage will be.

Now here’s the catch, avoid the one-size fits all or loan of the month pitch.  Every borrower is unique and a good lender will ask about your goals, personal financials, discuss options, and tailor a program that meets your specific needs.  This is probably the largest financial transaction you will ever make and you need to work with reputable professionals who really have your best interest at heart.

Now, about that “contact a Realtor first” option.  It’s not a bad idea to reach out and ask a Realtor for a referral.  Contrary to popular belief, Realtors do not get anything for referring a lender, in fact it’s illegal to do so with the anticipation of something of value in return.  We do it because we know everything hinges on the financing and when we can tap into professional relationships with people who have a proven track record of getting the tough deals done, well it just improves the odds of a smooth transaction.

If you need to sell before you buy I would suggest contacting that Realtor, or, if you have been happy with your current lender, contact them directly.  Keep in mind the market and rates may have changed since you got your current mortgage, but be sure to ask about any current client loyalty programs, rate breaks or discounts on loan fees, etc.  At the end of the day your current lender wants to keep your business and may offer you incentives.

Now it’s your turn!  What questions do you have?  Send me an e-mail to smartREsolutions@gmail.com and I will post and answer in a future post.  Thanks!

 

Not so boring market stats…

It’s no secret that San Diego is in the midst of a once in a generation type sellers market.  My question is, “Do you really, really get that?”  I mean really?  If you are in your first home, a “starter home” type property, now may be the best opportunity you ever have to cash in and move up.  Now, there are a few considerations and challenges:

  • Prices are high
  • Inventory is low
  • Interest rates are holding

So what does that mean?  High prices will benefit you as a seller, so that’s good!  The flip side is you will pay more for that move up property.  The questions is, “Will it be worth it?”  I bet yes, if you are planning to buy your home for life…where you will be for the next 15-20 years or more.  That’s the trade off, get what you want now for the long haul.

Low inventory means your options might be limited in some price ranges and locations.  Keep an open mind on these things and you should be OK.  One word of caution, as this is an EXTREME sellers market, don’t low ball!  Come in with your best offer out of the gate and understand you probably will be in multiple offer situations.  Focus on the end game…your “Forever Home”.

Interest rates and loan options could be your saving grace.  You can get into a home for less money out of pocket, and a monthly payment that could be close to your current payment.  Find a good lender who will work with you to create a loan that works for your situation and not try to push you into “the loan of the month”.

Below are some visuals on a few core metrics I track to gauge the market.  This data is pulled from the SANDICOR MLS using a platform called InfoSparks.

 

 


If you’d like to see market stats in your neighborhood, please let me know. I can pull this down to the zip code or community level and would love to share what your hyper-local market looks like.

The best real estate investment strategy is…

1031_Exchange_2For my money it’s the 1031 tax-deferred exchange.  The 1031 allows owners of investment property to exchange certain types of property and may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.  In essence you can sell (exchange) your rental condo in Arizona and buy a duplex in San Diego.  The catch is the properties must be “like-kind” which means the properties must be investment property.  It does not matter if one is a single family home and the other is a 4 unit building.  Like-kind simply means property held for investment.

Now, there are many rules to follow, which I will cover in my next post, but I want to show you the real benefits of a 1031 exchange.  Here are the 5 main reasons to exchange, courtesy of Asset Preservation.

  1. PRESERVATION OF EQUITY
    A properly structured exchange provides real estate investors with the opportunity
    to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Often the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!
  2. LEVERAGE
    Many investors exchange from a property where they have a high equity position, or one that is “free and clear”, into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits,
    which therefore increase the investors’ return on their investment.
  3. DIVERSIFICATION
    Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region, such as exchanging out of one apartment building in Denver, Colorado, for two additional
    apartments – one in Los Angeles, California, and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type, such as exchanging from several residential units to a small retail strip center.
  4. MANAGEMENT RELIEF
    Some investors accumulate several single family rentals over the years. The ongoing maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better
    suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.
  5. ESTATE PLANNING
    Sometimes a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one
    large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property, which they can either hold or sell.

Stay tuned for the next post relating to the 1031 exchange where I will cover the anatomy of the exchange and also share a case study.