Further Adjustments in the Lending World
August 19, 2015
Once upon a time, inflation settled naturally into the housing market. There was also a time when the next home sold on almost any street would sell for a little bit more--just because. No one minded because we are geared to profit, cost of living increases and healthy inflation. But now, the garage has to be bigger or granite has to be in place of the old Formica tops.
Thanks to the lending sins of the past, there are many regulations governing the elements of appraisal. Lenders rarely know who the appraiser is. This is to prevent communication and influence. Appraisers used to rely on real estate agents for assistance in providing comparable sales. That was particularly true where the appraiser pool originated in communities far away. Now, they will take input but must do their own research.
It used to be that there could be discussion about a valuation where something was missed--like an infinity pool instead for a typical in-ground pool or a particularly popular school district or historic area. An appraisal review was common and often adjusted when warranted.
It used to be that homeowners could count on the their home hedging against inflation and reasonable increases occurring from sale to sale.
Recent experiences have shown that the rules governing appraisers and their work have so tightened there is little room for discussion and valuation increases.
Cases in point. A recent sale of a tract home stated the home had “no patio.” In fact, the seller had meticulously built a patio and entertainment area that cost over $30,000. A appraisal rebuttal simply asked for value to be added for the improvement, but the appraiser stood by his appraisal and the house had to sell as if there was no patio. This hurt the comparables for the neighborhood. The buyer acknowledged the error and agreed to pay an additional $10,000 in cash for the home.
In another situation, an appraiser would not go to an adjacent tract of condos (located across the street and built three years later by the same builder) to help establish value for a unit highly graded. She would only look to homes within the existing tract.
The resulting challenge is when an appraisal falls short, there is a new negotiation. If the seller is unwilling to adjust the sales to price the meet the appraisal amount, the buyer has four options. One--pay the difference in cash; two--ask the seller to meet in the middle; three--ask the seller to carry the difference in the form of a second trust deed with lender approval, or four--the buyer can cancel. If the seller does not reduce the sale price to the appraisal amount and the deal stays together, buyers will feel they over-paid for the property even though they love it
In another recent transaction, sellers listed their very desirable condo at $10,000 over the last sale. Buyers loved it and knew they were competing so they offered $5,000 over asking price. Appraisal came in the same price as the last sale--$15,000 less that the sale price.
The buyers were stuck because of their small down payment. Several negotiations went back and forth and many compromises were made. The home sold for $5000 over the appraised price but the buyers had to bring in $5000 cash, agree to do all repairs and pay for termite corrective work in the amount of $3000.
When this circumstance occurs, conversations between the Realtors must go to their highest level of professionalism so as to best represent their client’s interests.
As in most of life, if everyone doesn’t win something in a transaction, it’s never regarded as a “good deal”.
The point to be made is that sellers must temper their expectations when pricing their home--even though the quality and location may be superior to recent sales. They should work closely with their Realtor evaluating market data and the options that fall to overpricing a home--even though buyers are lined up to make their offers.
In reality and in light of a market that is ever changing, Realtor® input and guidance is necessary, but sellers decide what price to ask and buyers decide what price to pay. These decisions should be made only after complete and impartial market data has been presented for review and analysis.
Kay Wilson-Bolton has been a Realtor® since 1976.