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.

 

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The Top 3 Real Estate Deal Breakers…

Deal or no deal?  When it comes to real estate there is only one thing that really matters…Closing!  It’s what all the players want and strive toward.  Everyone wants to close!  The trick, of course, is to navigate the many pitfalls along the way so everyone gets what they want.  After nearly 20 years of practicing real estate, I have seen lots of things that complicate transactions and cause escrow to fall apart.  However, there are 3 things that almost always kill a deal.  And here they are!

Deal Breaker #1:  Property condition.  In California the real estate contract is set up so that each transaction is an “As-Is” sale.  Basically that means that language is included in the contract that states the buyer is buying the property in its present, as-is condition, subject to inspection rights.  The problems arise when sellers or agents don’t disclose problems or potential problems.  Preparing the buyer can save a lot of time and money down the road.  If the buyers come in with eyes wide open and have a good understanding of the property condition then the transaction can most likely move along.  Certainly there are things that the seller may not know about and that are discovered during the home inspection, but if everything the seller does know about is disclosed upfront, then the buyer is more likely to be understanding of additional concerns.  There is almost always a secondary negotiation that occurs after the physical inspection, so as a seller be prepared for that!  Don’t take it personally, every house has problems!  As a buyer don’t nickel and dime the seller!  If you are asking for repairs or credits, keep it to items that are safety and/or health issues.  The inspection is not a laundry list of upgrades for you to ask for.  It’s to get a neutral 3rd party opinion of the condition of the property.

Deal Breaker #2:  The Appraisal.  Having the appraisal come in under the agreed upon sales price has become more common over the past few years.  Short sales and foreclosures have caused appraisers to have a hard time with values.  It’s important to understand what exactly an appraisal is.  It’s an OPINION of value as of that given day.  The market is fluid and changes daily, even hourly.  A new listing coming on the market, or a sale closing the day after your appraisal will have an impact on the value of the subject property.  While there is some science involved it’s also an art.  If an appraiser is not familiar with the neighborhood that could be an issue.  After all we buy a house for more than just the house, right?  A great school district can affect value.  So can a freeway running through the backyard!  When an appraisal comes in low there are basically 3 things that can happen.  The buyer can come up with the cash for the difference.   This rarely happens in a declining market because who wants to overpay for a home?  Second a seller can lower the price to the appraised value.  This happens fairly often in these circumstances, but can be tricky if the seller is close to break even on the property.  Third, the transaction is cancelled and everyone walks away.  Not a good thing, but again it’s fairly common.

Deal Breaker #3.  Financing.  This is the key to everything…no pun intended.  Getting the loan is at the root of every successful closing.  The most important thing to consider here is to work with a lender that will tell you like it is.  The fact is either you can afford the home or you can’t.  There is no maybe.  One of my biggest pet peeves is a lender that says they can do it and then they can’t.  Tell me upfront!  I know you want the deal but not everyone can buy right now.  Do us all a favor and tell the truth!  We can handle it.  Here are some tips on financing.

  • Ask for recommendations:  Your friends, co-workers and family members may be able to recommend a good lender. Ask them if they are happy with their loan and their lender’s customer service. Whatever you do, do not settle for the first company that offers you a loan. Find a trustworthy, reliable lender that is the best fit for you.
  • Fixed-rate vs. adjustable rate: A fixed-rate mortgage has an interest rate that locked in throughout the life of the loan (usually 15 to 30 years.) On the other hand, an adjustable rate mortgage (or ARM) has interest rates that vary over the life of the loan. With an ARM, your interest rates can change every six to 12 months or even monthly. Typically, an ARM’s interest rates are tied to an economic index, such as the national mortgage rate. When rates are high, your rate will increase. When rates are low, your rate will drop.If mortgage rates are extremely low when you’re buying a home, you should probably choose a fixed rate loan. That way, your rate will be locked in at this low level for the life of your loan. On the other hand, if interest rates are very high and you think they will decrease soon, you may consider an ARM. However, this is an extremely complicated decision, so you may want to discuss your options with your real estate agent or a financial adviser.
  • Rate lock-ins: If you expect interest rates to rise in the near future, you should ask your lender for a mortgage rate lock-in when you apply for the loan. This ensures that the rate the lender offers you will stay the same for certain period of time (usually 30 to 60 days.) That way, if you buy a home within the next month or two, you’ll be guaranteed the same mortgage rates that are available today. Once you lock in your rate, ask your lender for a contract or statement including your interest rate and the amount of time the rate will stay the same.
  • Closing costs: There are countless fees and closing costs associated with mortgage loans. These fees can add up quickly and easily push you over budget. Make sure your lender provides you with a Good Faith Estimate, and take time to read all the fine print. Ask plenty of questions about any fees you don’t understand or consult an attorney for further explanation.
  • PMI: You are required to pay Private Mortgage Insurance (PMI) if your down payment on a home is less than 20 percent of the total purchase price. PMI is a type of insurance that protects the lender against the risk of your default-which is what happens if you can no longer make your monthly mortgage payments. Although the cost of PMI varies depending on your mortgage company, premiums typically run about 0.5 percent of the loan amount for the first year of the loan. PMI premiums usually decrease after the first year.
  • Get pre-approved: Once you find the perfect lender, go through the pre-approval process with them before you start your house search. When you get pre-approved, you won’t be tempted to buy a house you can’t realistically afford. Plus, when you’re ready to make an offer, pre-approval also gives you stronger negotiating leverage. If a seller knows you’ve already been approved for a loan, they’ll be more likely to take your offer seriously.

So there you have it.  The top 3 reasons real estate transaction fall apart.  Of course there are many other reasons things go wrong, but 9 times out of 10 one of these 3 things comes into play.  If you’d like more information you can visit my website.  For buyer info click here.  For seller info click here.  Thanks for checking in and see you soon!

Video from the March Real Estate Mixer…

We had a great time out at the Mixer and I wanted to share some video comments from a few attendees.  The next mixer is April 14th 2010 at Bing Crosby’s Restaurant and Lounge in Mission Valley.  For details and to RSVP visit the events page at:

http://facebook.com/C21AwardInteractive