Appraisal. The word alone is enough to send shivers up the spines of Real Estate agents, mortgage brokers, home buyers & sellers alike. If you haven’t heard of the recent difficulties in this murky aspect of a home purchase, you just haven’t been paying attention. Hands tied by draconian new(er) regulations, appraisers have a thankless job. Blindly drawn to appraise neighborhoods they may not be familiar with, forced to attribute arbitrary “declining market” markers to a subject property’s value, enrolled into witness protection while the report is being prepared so as not to be unduly influenced by germane information that an agent may be able to provide … the whole endeavor is nothing short of a hot mess at present.
Case in point: on a quarter of a million dollar home sale, I recently experienced the unique phenomenon of an appraisal coming in $500 short of the purchase price. That’s right, boys and girls, this particular appraiser was so astute that he was able to tell a willing buyer and seller that they missed market value by approximately 0.2%. This despite the fact that he jumped subdivisions to find lesser comps than those within the target neighborhood of similar size, age and sale dates. Who knew a third party evaluation could spot a missed market value by such an incidental amount? Ring the bell and give that man a stuffed animal! We’ve got ourselves a bulls-eye!
This was simply the latest in a string of dubious evaluations. $3000 short here, $1500 there, it’s getting to be a common occurrence for an appraisal in 2010 to come in just shy of the purchase price. I don't necessarily fault the appraisers per se, but the underlying forces which stir this cauldron of idiocy. It's almost as though there were some unspoken mandate from the banks themselves to artificially cram down values.
Hmm ….
Considering there is also a rash of appraisals getting reviewed and rejected at underwriting by a bean counter in a bunker who considers himself a higher authority on property value than the professional whom the buyer just paid $300-400 for an independent evaluation (I recently had an underwriter downgrade a purchase price appraised value by $5000 for no discernible reason), it begs the question:
Are banks attempting to minimize their exposure by willfully renegotiating deals?
Less a hysterical conspiracy theorist than a cranky agent who scrutinizes value to death before moving forward with my clients, it makes one wonder. Especially when said agent typically goes years at a time without running into an appraisal issue (due to preventative due diligence), only to sprint headlong into four successive minutely low evaluations.
A bank shaves off their exposure a little here, a little there …
Appraisers know that in addition to the absurd rolls of red tape they must claw through on each file, they have overzealous underwriters scrutinizing each report like it’s a chain letter from Ted Kaczynski. Hard not to surmise that many appraisers aren’t demonstrating their thoroughness (and preventing underwriter demands to change the comps used, market factor variables, etc) by bringing in their evaluations just shy of purchase price intentionally. Whereas in the past the sales price was widely considered the first and best comp as it demonstrates the most current meeting of the minds between a willing buyer and seller in the open market, I’d hazard that it is now treated as a numerical limbo stick. Get that creaky evaluative body just underneath the bar, no matter how much contortion is needed to get there, and you are through to the next round. Bump your belly against the sales price, however, and you are likely back in line to try again - if not booted out of the rotation altogether.
This is becoming a very considerable problem for those seeking closing cost assistance.
With my listings, I am much more cautious now when entertaining offers which include a seller concession. Given the dearth of down payment options between 3.5% (FHA) and 20% (conventional), it poses some difficulty. Many buyers, especially first timers, are a bit cash-strapped in today’s economy. While scraping up enough for the down payment and seeking a seller concession towards costs has been the play for the past couple of years, I am becoming much more leery of that tactic with each successive appraisal shortfall. You ride the horse you have, but given the choice of two scenarios, I will recommend my sellers work with an offer with a lower price and no concession versus a higher price with seller concession every day of the week. Taking more risk out of the transaction, it might even be worth paying the insurance of a lesser net. You don't make any more money if the deal explodes on the way to the closing table.
While we agents often think of appraisal difficulties from the listing side of the table, forgive me a brief patting on the back before I flip the script. Making myself the point of contact for access to my listings, I meet appraisers with an informational packet the size of the pending health care legislation. My properties are not an easy mark for downgrading, and I haven‘t lost an appraisal on that side of the table for quite some time. Where I have encountered difficulties are with my buyers on properties in which the listing agents never inserted themselves into the process. No comps provided, no list of upgrades, nada. A low appraisal sounds great in theory for the buyer, but that is not always the case. While rubbing our hands together in anticipation of the price reduction we are going to force out of the seller, many equity-starved sellers in our market are simply not in a position to eat the loss by adjusting the purchase price to meet the appraised value. Negotiations begin anew, and the buyer often has to bring in additional monies to salvage the sale. Additional monies they may not have, or have earmarked for a refrigerator.
How odd to represent your buyer’s interests by disputing a low appraisal. In a case where a seller is unwilling or unable to reduce the sales price to the appraised value, it is just one of the strange bedfellows that occasion the slumber party hosted by the new rules of Real Estate. Should this trend continue in which I find listing agents not doing their parts to demonstrate the property’s value, it might behoove me, as the buyer’s agent, to take over this responsibility. Sounds contrary to the interests of the buyer at first blush, but if we are confident that the value is there and can ill afford to bring in any additional cash to closing, it just might be my fiduciary obligation to ensure that a bogus appraisal and/or underwriter review does not derail my client’s dream of home ownership.
Mama told me there would be days like these, but she forgot to pack my Thomas the Train pajamas.
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