All over the valley, I am seeing clients “lose out” when putting offers in for a home – mostly in the sub-$200,000 range. Bank owns the property, puts it on the MLS, the offers pour in and more often than not I see my clients (those that don’t have enough cash to buy the property outright) lose out to cash buyers.
If I had to pick a number of the average times I see someone who wants to live in the home and finance it with a mortgage have to put in an offer before they actually “win” and get the offer accepted… I would guess anywhere between 3 and 5 times.
That means anywhere from 3 to 5 times the buyer falls in love with a house, puts an offer in and just hopes that the seller (usually the bank) accepts the offer. When you hear that, what is the first thing that you think of? If you are a real estate agent, you might think of how many times you are going to have to drive around to look at properties.
The first thing I think of?
I hope the property appraises for whatever they offered to “win” the bidding.
The second thing I think of?
I hope that I can get at least one underwriter to agree with the appraiser and not cut the appraisal for some reason.
If you are someone who is interested in buying a house but find yourself losing out in the current bidding wars going on and decide to bid over asking price – be aware of what potentially could happen even if you win the bidding.
If your offer is accepted, the next step is to have your property appraised. Remember, appraisals are just one person’s opinion of value – and you may be surprised at how different “opinions of value” can be. A normal person might think “seller is willing to sell at X, buyer is willing to buy at X, property must be worth that much, right?”
Not always.
Lately I have seen more than one appraisal come in under contract price – even as much as $50,000 under contract price (that is a high % when we are talking an under-$200k home) and if your appraisal comes in short, you basically have these options:
- Cancel the contract because the property did not appraise for the sales price
- Get a different appraisal done
- Negotiate with the seller to lower the sales price to the appraised value
- Bring the difference between appraised value and sales price to close in cash
So if your appraisal comes in at sales price, you should be fine, right?
Maybe.
But more than once lately, I have submitted a loan to an underwriter who decided that they didn’t agree with the appraiser on what the value of the property and decided to just “cut” the value to what they thought it should be.
Now if you find yourself in this situation, there is one thing that any good loan officer knows – it isn’t a bad idea to submit the file to multiple lenders if you have concerns about the appraised value. Lenders don’t particularly like this because they may end up taking the time to underwrite the file and it may close with another lender – but it is one of the dirty-little-secrets of how to deal with an underwriter who doesn’t like an appraised value.
And in my experience, as long as you do what is best for the client, everything else will fall into place.
About the Author: Justin McHood is a mortgage broker with VanDyk Mortgage Corporation. You can find him at Arizona Mortgage Team, on the Zillow’s Mortgages Unzipped Blog, and at most East Valley Friday Nights gatherings. He’s the one in the blue shirt.
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I have seen all of this in the past month – multiple offers, low appraisals, desk reviews cutting the values. It's a new market out there. AMC's and the new HVCC has a lot ot do with it as well.
This is good info, thanks.
I have seen all of this in the past month – multiple offers, low appraisals, desk reviews cutting the values. It's a new market out there. AMC's and the new HVCC has a lot ot do with it as well.
This is good info, thanks.
If so many houses are going to cash buyers, that suggests investors are big players in the market again. The average person that wants to buy and live in a $200k house doesn't have that laying around in cash. And if it's investors, then when they decide to put their money elsewhere, everyone sells and we have another crash. Data I saw from July 2009 shows monthly sales of 7000 which sounds great, but 5600 are houses priced $200k and under. Average selling time of houses over $200k is 8 months. So that part of the market is still dead.
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@Tyler,
Thanks for your comment — after listening to two different loan officers tell me that “their files weren't having these problems” this morning at #evtm at Liberty Market in Gilbert, I was kind of wondering if I was the only one seeing this.
So if nothing else, you are helping me know that I am not alone in seeing this.
@gar62
Great point about the market being hot in the under-200k and chilly in the higher priced market. Thanks for the comment!
Buyers need to be able to roll up their sleeves and get ready for a long process. I have had a byer put an offer in last Feb and now it is finally going to close. I am surprised that they could hang for so long. good luck and keep blogging
Funny, I just made basically the same observation, but from a different direction on my site http://whiteoaksblog.com/2009/08/27/first-time-...
One point of correction (at least as it applies in CA) … just because the appraisal doesn't come in at value, it's not automatically a reason to cancel the contract. The way I understand it, you can only use the lower appraisal as cause or cancellation IF it results in you not getting the loan you committed to in the contract. The difference being with large down payments (and consequently lower loan values) a lower appraisal may not necessarily make a difference in your loan.
Great points, though….it's happening everywhere — not just in AZ!
Thank you for writing this piece! I would love a little advice on how to be a bit more effective in dealing with this situation… I'm trying to buy right now, and surely not over extend myself. My budget is $120k and I've been looking at the homes around $95-105k to be able to offer slightly higher to stay competitive (which we learned the hard way is absolutely necessary at this point). We're on our sixth offer and getting really discouraged. How is the average person supposed to buy a home right now when competing with these cash buyers? The normal working person doesn't have $120,000 in cash sitting around! My heart got absolutely broken at this most recent loss, and I feel like there has to be a better way. Can you give me any insight as to how we can be more effective with putting in offers to the bank?
Hey Chuck! In AZ, it's pretty clear. The standard AZ residential purchase contract has this appraisal contingency:
Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived. (my emphasis)
So here in AZ, it's not tied to the loan at all. Theoretically a buyer could cancel if the appraisal came in $1 low…
Just goes to show real estate law, contracts and practice are local and people should ALWAYS consult with a local professional.
Hi Molly – it can be VERY frustrating, hang in there. Here's a post I wrote back in April that may provide some things to think about when it comes to making an offer on a home. Price is important, the most important factor, but it is NOT the only factor:
Making an Offer on a Phoenix Home — It's not all about the Benjamen's
Good luck in your home search and don't give up!
Hey Jay!
Thanks for the clarification. We actually have two different purchase contracts that are used in CA. One has a specific clause about the appraisal (like AZ) and the other doesn't. Just needed to make things even more confusing I guess! (Maybe that's why there are so many lawyers in CA??)
Hopefully FHA dumping the HVCC will help resolve the appraisal issues.
We really don't face these situations in my neck of the woods, at least not in terms of the percentage differences you speak of (50,000 below contract)…
Thats a hyper local thing too, Portland is not experiencing the same thing at the moment, but we have been there before. I guess it is just your time right now.
-Tyler
Hopefully FHA dumping the HVCC will help resolve the appraisal issues.
We really don't face these situations in my neck of the woods, at least not in terms of the percentage differences you speak of (50,000 below contract)…
Thats a hyper local thing too, Portland is not experiencing the same thing at the moment, but we have been there before. I guess it is just your time right now.
-Tyler
I had three short sale properties not appraise in the 11th hour last month.
Talk about a nightmare!