Ideally, the real value of any given property is what a buyer is willing to pay for it. Unfortunately, many appraisers no longer support this idea because of all the heat theyâ€™ve taken as a result of the marketâ€™s collapse. Usually, once an appraisal has been performed, the damage is done and banks will only lend to the appraisal. It really does not matter what YOU think the property may be worth, even in relationship to other surrounding properties.
There are a couple of issues here:
(1) Current overbidding on homes in the San Ramon area (and most other Bay Area neighborhoods, for that matter) is causing prices to rise above the level at which many appraisers will appraise. Itâ€™s not uncommon now to have counter offers coming back asking for the Appraisal Contingency to be removed.
(2) HVCC is causing havoc with appraisals â€“ many appraisers are coming from out of the area and providing appraisals which truly do not reflect local market values.
If you get a low appraisal, you can ask for another appraisal or have your Realtor provide the current appraiser with current market data which may help them reassess the value. Donâ€™t hold your breath with this, however. Typically, and unfortunately, a low appraisal means any of the following:
(1) The seller has to lower the price,
(2) The buyer has to bring more cash to the table,
(3) Any combination of the above two scenarios OR
(4) The deal is off.
(5) The seller should, in keeping with proper disclosure laws, disclose the low appraisal to the next round of buyers.
Itâ€™s one of the sad realities in the current market.
Here are a couple of posts that may be helpful:
New Appraisal Guidelines: 3 Negative Ways This WILL Affect YOU!
Failure To Disclose a Low Appraisal Can Cost You Plenty: 5 Critical Conclusions
â€œOne thing confuses me though. With the hvcc guidelines (I know, realtors and others hate them) shouldn't the assessment be based on realistic pricing?â€
Thatâ€™s one of the things that makes us so angry â€“ they donâ€™t! We just lost a condo deal because the out-of-area appraiser came into town with no idea of the area, and priced our unit $30,000 under an identical (in every way) unit that had just closed three weeks previous. Even after meeting with the appraiser and filling her in on neighborhood details (she responded to the important details with, â€œGosh, I didnâ€™t know that â€¦) AND providing her with written, verifiable comps â€¦ she still came in $30,000 low.
â€œIf not (as you suggest strongly) what are people doing when the appraisal does not work?â€
In our case, the deal blew up.
(1) The seller was not willing to sell at a lower price than the exact comp just down the street,
(2) The lender was not willing to exceed the appraisal,
(3) The buyer was not able to come up with the extra cash to close,
(4) The seller was devastated because the appraised price would put them into a short sale, and, since they now have to disclose the low appraisal to the next buyer â€“ who more than likely will NOT be willing to exceed the appraised value â€¦ the seller had no choice but to take the property off the market.
(5) The buyers paid $1,150 out of pocket for inspections and the â€œappraisalâ€ which was money down the drain â€“ no hope of recovering it from anyone.
SERIOUSLY unfair for all parties concerned.
â€œOR do they just have to have a big stash of cash to cover the difference, if not, far to many other buyers will?â€
There are LOTS of cash buyers out there in our market right now who donâ€™t care about the appraisal. Also, if the property is an REO, cash buyers can actually get properties for less that conventional or FHA buyers because banks know they can close in 10 days or so.
Hope that answers your questions.
Fully understand your frustration and the sticky situation it puts you in. We've seen this happen a lot.
Iâ€™m appreciate much of your input, but Iâ€™m going to have to disagree with you on this one. You state, â€œAs a buyer the appraisal is a gift.â€
Iâ€™d agree â€“ expect in the current market AND with the advent of HVCC. HVCC has cause us NO END of problems, and it has nothing to do with establishing fair prices for local housing â€“ it has more to do with appraisers coming into the area who simply donâ€™t have a clue what they are doing. Happens time and again. Weâ€™ve had to explain the forms to them. Weâ€™ve had to meet appraisers whoâ€™ve driven in from 3 counties away and explain to the basic fundamentals of the neighborhoods, differences in local schools, why specific homes are different than three blocks over (different zip code) and more. It is appalling. And the market is suffering as a result.
You add, â€œYou can go to the seller and say â€˜Hey, this is all it is worth. I can not get a loan for more. Will you take the appraised amount or not?â€™â€
In the current red hot Bay Area market with multiple offers on everything, the answer is â€¦ NOT. And then they move onto the next buyer in line. And here is the rub: because to the 5-7 day Inspection Contingency time periods demanded by REOs, buyer #1 has usually already paid for their inspections by the time the appraisal arrives. If they cannot put more cash into the deal or negotiate with the seller, then they loose the money theyâ€™ve put into their inspections â€“ up to $750.00 PLUS the $400.00 they spent on the appraisal. And the next buyer in line gets the inspections for free AND can do another appraisal. Itâ€™s not equitable in any way. And then the first buyer has to go and try all over again. And it will be at a higher price with the next home. (FYI, not many buyers have an extra $1,150.00 to throw away)
AND â€¦ with home prices rising, many buyers, if they donâ€™t get in now, are actually being priced out of the market.
You further state, â€œOnce they realize the appraisal will stick with the house for a fha loan for a very long time they are more likely to take the low offer. if they do not, you walk away and do not overpay. Simple solution.â€
Not so. The FHA offers get pushed to the back of the table, the cash and conventional folks step up and the home goes back into escrow. ANDâ€¦ when it closes, the higher price becomes the new benchmark for the neighborhood. Happens EVERY day. And there are TONS of cash buyers in our market right now â€“ many of whom donâ€™t even bother with appraisals.
You end with, â€œ$620k sounds like far to much to buy a house for. I will not pay even half of that. I will also be getting acreage.â€
Good thing you are not planning on living here in the Bay Area â€¦ enjoy your life in Bangor, because when you move into a metropolitan area such as ours, you pay the going rate â€¦ or move back to the sticks. As for acreage â€¦ not going to find much of that here â€¦ unless you have 3-4 million to throw around â€¦
We warned about HVCC a while ago:
New Appraisal Guidelines: 3 Negative Ways This WILL Affect YOU!
What the other agents have said is true. I have represented buyers in this senario and the seller ended up lowering their price or the deal was off. When taking a listing, I believe it to be my responsibility to warn the sellers of the current appraisal climate and therefore they are are prepared that they may sell the home for less than a person is willing to pay. I have even suggested they get a pre-appraisal, so the current market is telling them the value of their home, not me.
I think this situation will change in the coming years, since the goal is to find homes for 'qualified people' and with the new banking restrictions, this is being accomplished.
Why not find another home and make an offer that you now know will be in the ball park of the appraisal? We expect many more properties to come on the market this year.
It seems another bubble is building in Windemere which will blow after March 2010.
With large down payments financing doesn't drive value. An FHA buyer with little skin in the game is looking to get in and like a car purchase he/she is looking principally at a payment. Competing with cash offers thieer best option is to throw money at sellers to compensate for the weakness of their offers (no down payments). Having several large down payment buyers on a home means that the 2nd highest price is arguably the true value of the home since the highest bidder in this made up scenario is just the perosn willing to put more of his cash on the line. This seems like a better way.
Since the banks are manipluating the market for reasons that benefit only them, consumers are forced to deal with miserable market conditions as described. This costs everyone money in some way shape or form as described by others. The problem the banks want to aviod is having prices go up while they are withholding all the phantom inventory and still foreclosing on people in record numbers.
Think about this - If prices go up and they dump their phanotm inventory, then there is the risk that the default problem never goes away. If they artifically hold prices down and make buyers give up their cash to cover overages, then 1) The banks get all your cash and 2) they can trickle inventory onto the market at higher prices without further default risk. See Win - Win...for the bank.
I guess the bay area is doing better than a lot of the country. I will defer to you as it is your market. Since fha is doing the lions share of the mortgage business these days I guess I forgot about the other options. <blush>
I know, some areas have horribly high house prices. Usually, the same areas have horribly high wages. It is kind of amazing how they line up. There are some areas I could not afford a shack on a corner lot. Some other areas I could get a ranch with a lot of acres and buy 2 of them.
One thing confuses me though. With the hvcc guidelines (I know, realtors and others hate them) shouldn't the assessment be based on realistic pricing? If not (as you suggest strongly) what are people doing when the appraisal does not work?
OR do they just have to have a big stash of cash to cover the difference, if not, far to many other buyers will?
We are in the same EXACT situation at the moment. (We were planning to close on Monday) And let me tell you, the $35,000 difference in bank appraisal vs. sale price has been no "gift" to us. We had no idea the appraisal would come in SO low. We thought we agreed on a fair price. The seller is so upset & doesn't want to "give" her home away. We want the home, but everyone has told us NOT to offer more than appraisal. If we don't purchase this home, I feel like we will continue to go through this process of low appraisal & unwilling seller to sell at appraisal price each time. That will get pretty costly, not to mention very mentally exhausting
GREAT article about the risk involved when not disclosing knowledge of the bank appraisal to the next potential buyer, I'll pass it on to attorney & agents. Thanks everyone for such great info. & suggestions. Very informative and helpful!
1) Go with the in house lender suggested by seller agent and pay higher interest rate and fee
2) Arrange for loan from someone else -- (Credit card) or empty bank account (we prefer to have some months in reserve in case of unexpected event such as job loss)
3) Or Possibly loose the escrow deposit.
Our contract was clear - 20% down at a certain interest rate (which cannot be met now). How soon should I get an attorney involved in this case? Can escrow release funds to seller/seller agent with out my consent?
This is an excellent lesson for those who would contemplate making an offer with no appraisal contingency. If you had waived the appraisal contingency, you would be crying now.
I have seen sellers get wise to the strategy of over-bidding in the expectation the appraisal would allow a lower price to be negotiated. This is often done in a multiple offer situation by a buyer who is attempting to make an offer that is higher than the other buyers in order to gain acceptance. In this case, the offer is over the comps, over the market and unrealistic. But the expectation is that the sellers will be attracted to the price, will agree to the offer and be forced to renegotiate when the property does not appraise. I have seen sellers issue counter offers that demand removal of the appraisal contingency prior to acceptance in order to thwart this strategy.
We knew appraisal was going to be low, but we did not know it was going to be this low. We already were putting up 20% (80-20 loan) and cannot make up all the difference. We offered to cover about 2/3rd of difference and wanted seller to put the other 1/3rd, but looks like seller has lined up another buyer and we will not get this home. It is frustrating that the full home inspection and appraisal costs were spent in vain. We are going to keep looking :-(
Unfortunately, it is the banks through the appraisal process who now largely control property values.
You can go here for more opinion on the subject:
The 680 Group at Alain Pinel Realtors
Once they realize the appraisal will stick with the house for a fha loan for a very long time they are more likely to take the low offer. if they do not, you walk away and do not overpay. Simple solution.
$620k sounds like far to much to buy a house for. I will not pay even half of that. I will also be getting acreage.
I have nothing to add on the mechanics, the other agents have covered this pretty well. Let's me add something about my favorite topic of discussion - RISK.
The banks with the assistance of the government have created an environment where there is an artificial shortage of inventory and a glut of buyers walking around with FHA loans. The cash buyer is now being cought in the middle. With the next forclosure wave coming in 2010, and enough "phantom inventory" out there to keep prices low banks are pushing their risk (under the orders of Federal Regulators) back onto the buyers. Appriasers know this and do not want to risk any litigation so they are being very conservative on values. Rightly so.
The appraisers are caught in a tough spot, worse than buyers. If the powers that be can not keep all their balls in the air who are buyers going to sue? The banks, the appriasers and teh agents who advise removal of the appriasal contingency without CMA documents. Conservative appriasals protect the appraisers. (Sue the banks for even asking these things!)
Asset managers are pushing buyers as discussed by "da Mayor" to remove appriasal contingenies. (I had an asset manager ask me for this last week and I about hit the floor.) So the banks are asking cash rich buyers to assume the status quo. While the banks continue to take foreclosures at the current rate and slowly release the inventory, they are pushing the market RISK onto the buyers.
The combination of new government rules and the sour real estate market have combined to make appraisals a whole new adventure.
When a property does not appraise the appraisal contingency in your contract gives you to option of walking away from the property, putting up the extra cash to close or renegotiating the sale price. Have you waived the appraisal contingency? Assuming notâ€¦ask the seller to reduce the price. Point out to the seller that the next buyer, if you cancel, will very likely have the same appraisal problem. If you do not have the cash to bridge the gap between the appraised value and your contact price you will not be able to buy, the seller will not be able to sell and the seller may be challenged to get someone else to pay the price you have agreed to pay.
Have you investigated the competency of the appraiser? We have heard horror stories about appraisers since the HVCC has come into play. Is your appraiser competent and experienced appraising houses in this area?
I am sure that your agent has made these and other suggestions.
Bottom line is...how bad do you want the house? If the appraisal is sound, you may feel that you are overpaying if you put up the extra cash. If you really believe that the appraisal is too low and your contact price is correct, maybe you should put up the cash, if you have it.
Unfortunately, we are seeing this happen more and more often. It's hard to tell without knowing the house and the situation if the appraiser is off. Having said that, there are a couple of things I would do. First if your agent hasn't done so already, send appropriate comps to the appraiser. Have your agent look for comps that reflect the price you need. Along with that have them talk to the appraiser see how they came up with the result, build a relationship. Many appraisers aren't familiar with the areas they are working in so they can be incorrect. There are other things that impact the value and they may not know about them (the fact the inventory in Windemere has been very low recently). I would try and see what you can work out with the current appraiser and appraisal. If all else fails, ask for a second opinion. You have the right to, so do it if you can't work something else out. You may not get the solution you want, but before throwing in the towel (or coming up with the money) have your agent fight hard for you. That's what our job is, to fix these situations. Best of luck.
Erica Jones Starkey
JSCA Real Estate Group
Providing Superior Solutions for Your Individual Real Estate Needs
What you describe is common in this market. Appraisers are being very conservative, erring on the side of caution. You can submit your own comparables, meeting the appraisal quidelines of distance, school district, type, and time of sale and argue it out. You can order an entirely new appraisal and hope for a different result, which is unlikely, unless the appraiser did not follow the guidelines. You can pay the additional 30k or you can renegotiate with the seller. Finally, if you have a mortgage contingency in your contract, you can walk away. Check with your attorney before doing the latter.