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What about when the buyer agrees with the seller on price?

I have seen a lot of posts here on AR complaining about sellers who just won't lower the price of their home even when buyers are not biting. I have also seen complaints around the web here and there about appraisal issues killing deals.

Most often though it is refinance deals that an appraisal condition may kill. I have run into a first time issue for me... I have a seller who wants to sell his home for $335,000.00 and a buyer who wants to buy it. The buyer does not have any complaints about cost of the home.

I have always been of the thought that "if someone is willing to pay the asking price then it must be worth it." ... Supply and demand!

3 - 5 homes above $300,000.00 sell in this area per year. I initially got 3 comps that I think were pretty decent comps. I was asked for 2 additional comps that must be within a 1 mile radius, dated within 6 months, same GLA, Amenities, condition, style, and age. No, I am not kidding they really asked me for that...

Only 5 homes sold for more than $300,000.00 in the past 12 months. I already had 3 of them... and the other 2 were both over a mile away, sold more than 6 months prior, had different GLA, Amenities, styles, the condition was not the same, and they were different ages.

The borrower in this case has a 785 mid credit score, over 109k in his checking account (need 82k to bring to the table), is putting a 20% down payment, and is fully income verified. This is the clean kind of paper that lenders should be trying to write... not finding excuses not to fund!

Posted by Christopher Ohlsen on 05/01/2008 01:14 PM

Comments (15)

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15 Comments on What about when the buyer agrees with the seller on price?

MAY

2008

Certainly the borrower is well qualified to buy this home, and his chances of defaulting are slim to none (and Slim left town). But that's not the issue. The issue is the market value of the home and mortgage LTV (loan-to-value). Just because someone says he's willing to pay the price doesn't mean the house is worth it. You can't fault the bank in this case - especially in today's market!

The bank wants appraisals on homes that are similar in age, type, style, bedrooms, etc. and that have sold fairly recently (typically 6 months - 1 year), are of approximately the same age, and are fairly close in proximity (that's why you get 1 mile). That doesn't mean it's hard and fast. If there are none that fit the parameters, then there are none. Banks will allow some slack in those cases (i.e., recent sales 3 miles away), but be prepared to document it.

It all gets back to LTV (loan-to-value) - if the house appraises for less than the sales price, then the borrower will have to make up the difference if he wants to maintain 80 LTV to avoid PMI, or accept a higher LTV and pay PMI.

So, look at it from the bank's standpoint, be nice, and help the appraiser come up with the value. (Incidentally, the rules are a changin'. After Dece 31, 2008, you (and me) may not even be allowed to talk to an appraiser.)

Lewis - I do understand where the bank is coming from and I have done everything that I can to help the appraiser. The thing about this area is that the average sales price is $130,000.00 - $150,000.00. Anything over 300k here in Plattsburgh is considered a "higher end home"... There are not very many "higher end homes" selling here in Plattsburgh and for those that do the marketing time is usually more. Also, the area really makes a huge difference in these matters. One point spefically is that we are close to the Canadian border and as a result the weather gets extremely cold and this is not really buying season... So the comps are a little bit older.

I am looking at it from the banks perspective the thing is I just think that they are wrong:). I am confident that this home is worth every penny that it is selling for... In some areas people shop for a home based on style and amenities. In Plattsburgh, NY there is a mix and people do not really limit their shopping to style and amenities.

I guess that you would have to see this home to know what I mean... But it is a very beautiful home and it is well worth the asking price.

MAY

2008

The criteria the bank has requested are standard for comps. Unfortunately, finding comps for unusual properties is very difficult. Acceptance of comps on unusual properties takes a lengthy explanation.

Rosario - Yes, I know... and maybe I did not describe in detail the lengths to which my appraiser went to in order to justify the value. He made the proper adjustments and reconciled the differences within the grid to support value. He also included this note to the underwriter:

Note to Underwriter:

The comparables used are the best available. It is not possible to find an additional comparables within 1 mile of the

subject property and closed within six months.

The subject property is located in a suburban setting and the immediate market area does not have large subdivisions of

similar model homes and similar site sizes. The area is characterized by homes of various ages, styles, and site sizes. The

comparables used are the best available.

Typical purchasers in this market area do not differentiate between styles of homes and/or construction method (log vs.

stick built). The subject's market area has many various styles appealing to many potential purchasers.

In addition, the appraiser was not able find any additional comparable within 6 months. The subject home is located in a

suburban area within 20+- miles of the Canadian border. Therefore, the winters are cold and the snow substantial. Due to

these circumstances the number of sales is typically down in the 6 previous months prior to April.

The comparables used are the best available and the subject's market area is stable in value.

I guess that the underwriters do not like this as well. I am just a bit flabbergasted that I am having such a difficult time supporting value for this borrower. I feel that this borrower is being penalized because of the recently increased scrunity that appraisals are undergoing due to the rate of foreclosures that we are experiencing. My problem with this situation is that this is an A++ borrower and there is no chance what-so-ever that he will default on his payments.

The appraiser has some options here. His comments though they may be correct, appear to be rather vague. If I were in this situation, here is what I would do:

First thing is providing evidence of the stable market. The appraiser can provide a detailed analysis of value trends of other size, style, or age homes to show that when sales are available there are no declining trends even if seasonally. This can be done with a monthly or quarterly breakdown of median sales prices for the area.

Also if season is a factor, I would provide evidence of this in a breakdown of sales volume by quarter over the past three years or so, this will paint a vivid picture for the UW to explain why there might be a lack of sales over the winter months.

The appraiser is making a lot of statements in these comments but does not say how he arrived at his conclusions. He states that purchasers do not differentiate between styles and/or construction method. I am not sure if I would agree with this statement since it would be difficult to testify on what someone else is thinking when making a purchase. Maybe he means to say that there does not appear to be any price premiums between different styles and/or construction methods regardless of differences in costs of contsruction. This could then be followed up by an explanation of his analysis in pricing trends and over what time period.

This should not take the appraiser very long assuming that he has kept all the support for his conclusions in the workfile like he is supposed to.

In todays market, underwriters have growing concerns of declining markets and the accuracy of the collateral valuation. Not only are they having to make a decision on the borrowers ability to repay but now they are also ensuring that the package is marketable on the secondary market. Providing enough information for them to make an informed decision is what we should be doing in every report.

MAY

2008

Benjamin - I appreciate the perspective of an appraiser in this discussion. All of what you said makes sense which brings up another point. This appraiser is an appraiser that my firm has been using for a long time and I have sent him a good share of my business since coming aboard here at Lake City Mortgage. Recently amidst all of these changes in the industry and therefore in underwriting I have had to call him back on almost every appraisal for corrections. Of course I dread having to call him to make corrections in the first place because as I am sure that you know it is difficult for me to call up and ask for corrections when I am not an appraiser and I do not feel that it is either my place or in my best interest to tell a highly trained professional how to do his job. I am not just talking about an additional comp or a simple comment, but I have had underwriters actually ask me to give a specific line to an appraiser to put on the appraisal verbatim. Correct me if I am wrong, but I get the impression from many of the appraisers whom I work with that they are offended when I call up and ask for corrections. I trust and respect the expert opinions of the appraisers whom I work with; however I fell as though many excellent appraisers who have been doing this for a very long time are set in their ways and are not staying on top of agency guidelines... Or at least not adhering to what they should anticipate the underwriter will be asking for. As I said I trust and respect their expert opinions (of value in particular) but it would save me time and save more deals which in turn will at least help keep my local housing market safe and stable... We have plenty of qualified buyers and plenty of homes for sale in my local market area and the only thing threatening it is the tightening of credit and underwriting guidelines. My hope is that expert real estate appraisers stay on top of continuing education and at least make some concessions in their current business model to take into consideration that we are in a rapidly changing industry and use language on the appraisal accordingly as you have obviously done. Thank you for the comment Benjamin I appreciate your insight.

I have an update on this file as well. Unfortunately I did some investigating on my own and I feel that the market data available actually does not reflect the value very well. There was a ton of custom wood work that was done in this home which to both the buyer and seller are well worth the price which is what counts in my opinion. However, this home is a "White Elephant" in a sense because there is nothing really to compare in the area with regard to the assignment of value of the custom wood work. Prior to that custom wood work Zillow (I know not the most accurate, but is a public access database) says that this home sold in 04 (our peak in this market and most) for significantly less. The additional work to the interior was done since then (to my knowledge) but as I mentioned that is not really being considered by the underwriting department. In any event our value is lowered but I was able to restructure the transaction in 3 different ways 2 of which will include PMI... The other of which will require more of a check at the closing table. I am going to go over all of the options with the buyer on Monday and we are going to proceed with one of these options. I am also reducing the amount of income that I am earning on this transaction; I have gone through the ringer on this one because of the issue of value but as a result I feel that I have put the buyer through the ringer as well. I want my client to be completely satisfied with the service that I am providing him so I am doing my part to lower his expense on this transaction. I feel that this is the least that I can do.

MAY

2008

Blame Canada! :-)

As Lewis stated in the first comment, lenders will bend the rules in terms of the 6 month limit or 1 mile radius if the appraiser can satisfactorily explain. I know it does feel like they're not trying to win business. Put it this way, there's no doubt in my mind that lenders are overcompensating for the subprime meltdown by unfairly putting the screws to everyone. Even the high credit, plentiful asset borrowers.

MAY

2008

Tchaka - I'll just blame Canada:-).

Seriously though, yes I know that UW will make exceptions depending on how well the appraiser can justify the exception via an explanation. However in this case there really is not justification other than what has already been stated. It is unfortunate, but I am still able to get the deal wrapped up and I am doing what I can on my end to make this as smooth a process for my client amidst the turbulence that we ran into as possible.

I am not so sure that the problem can be isolated to "subprime" however. Fannie has lost 46% of its value and Freddie has lost 54% of its value in the past 12 months. Largely due to defaults; The majority of financing funded and purchased by these two institutions is "prime" paper...

I had the same thing happen back in Novemeber. Mine was only off by 2k, but in the end there was a bank owned home currently up for sale two doors down that helped push us past the issues. It was a very nerve-wrecking week though. (for me, the buyer, and the seller) The deal almost was lost completely. Hope yours works out!

MAY

2008

oh fun fun appraisal issues. I understand the banks perspective on appraisals. I understand they want salable paper on the secondary. I understand the recommended comp requirements written by Fannie and Freddie............... However........ Fannie and Freddie's recommended comp details are for certain market enviroments ( urban ) .. When something falls outside of that box, an explanation that does not have an adverse impact on marketibility should suffice. Appraisal guidelines change for different markets and economic conditions. In my opinion an underwriter sits behind a desk to sign off on stips and the appraiser determines value. We should all ask for the underwriters' appraiser license next time they send over stips like that. If we truly want independent appraisals for the bank and the consumer, we need to stay out of it. That means brokers, bankers, real estate agents,,, everybody!!! Right now favoritism is leaning towards the banks cautious opinions rather than a beneficial written report for the consumer. If a bank has a problem with an appraisal there should be a board that governs appraisers they can complain to but in no way should they be aloud to tell a licensed appraiser how to write a report or determine value form a desk in India that has no grasp on market conditions of Northern NY............

one more thing...... A property's best comp is itself........... particularly when no other comps are available. Maybe a consumer is overpaying if they are paying 300 and three houses similar sold for 200. But.. in most cases, solid comps are not available. In this case the best comp is itself and value is most closely linked to what someone is willing to pay.........Just because the underwriter can;t afford the home does not mean Dr Smith can not.....

Travis - You make a great point. I really think that if Underwriters are going to make determinations with regard to value that they should absolutely be required to complete a real estate appraisal course and earn a certification. They make assumptions based on current market trends but they do not know how to adequately assign value to real estate. They do not take any of the adjustments that appraisers make into consideration (most of them don't even know how to read). Luckily we are going to be closing this transaction either end of this week or next week but it is not getting any easier out there.

MAY

2008

Christopher, unbelievable! I think the country will be experiencing this scenario more and more down the road.

Duane - Definitely, I think that we will be seeing quite a bit more of this. There is talk about this mortgage and housing crisis bottoming out soon but the fact is that we have not seen the bottom and that means that before it gets better it will get worse.

MAY

2008

Krista - I love it when you really need a comp bad and then one closes down the street. This transaction closed and Funded last Friday fortunately. unfortunately my client now has to pay PMI as we brought the LTV percentage up instead of making him bring almost double the amount to the table. My first and most important objective is to serve the best interest of my clients. Because of this I have informed my client that I will refinance him down the road and charge ZERO loan origination or mortgage broker fee. There are still some closing costs associated with a refinance but they will not be mine:). I explained that to him and he is happy with the services that I provided. He thanked me and he knows that this was difficult because value was an issue. I love happy endings!

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