Are they doing appraisals in this market?
Things have just blown up in real estate since the presidential election. What was a hot market turned into a white hot unreal seller’s market. Looking back It’s obvious a lot of buyers were waiting to see what happened after the election before jumping in.
So what about appraisal contingencies in this seller’s market? The appraisal traditionally is the bank’s, and therefore the buyer’s, safety valve on a home purchase.
If you’re putting 20% down, borrowing 80% of the purchase price, and the appraisal comes in under the purchase price, then your loan amount is now 80% of a smaller number, because it’s based on the appraisal.
But wait, we offered the seller $600,000, and the appraisal is at $560,000. What do we do now? In saner markets, one of four things happens:
1. the seller adjusts the price down to the appraised value and the buyer actually benefits;
2. the buyer finds $40,000 extra and makes up the difference in cash, a net benefit to the seller;
3. the buyer and seller meet somewhere in the middle, with the seller accepting less and the buyer bringing in some cash to cover a portion of the difference; or
4. the buyer cancels.
Expect this approach to return once the market shifts to a balanced or a buyer’s market.
The market for buyers is insane, irrational, intensely competitive, and breaking new ground daily. Traditional conventions have flown out the window for the time being.
Never fear, we are still crushing it for our buyers, while at the same time protecting their interests as always. One way we are doing this is with a new approach to the appraisal contingency.
The appraisal is normally a confirmation that the price you’re paying is in line with the home’s value. In a market that increased 22.5% over last year, a low appraisal is not that concerning, as homes are increasing between 2-5% a month. As long as the home meets your needs, you can afford the payment, and you plan to be there for the medium to long term, the appraisal is more of a technicality.
The recently charted territory we find ourselves in now is how to win a bidding war against other buyers when prices are skyrocketing and buyers are offering way over the list price, thus putting the appraisal in doubt before the deal is even done.
Sellers, with so many offers over asking price, are leveraging this into contractual terms:
1. Asking buyers to waive the appraisal contingency altogether, and
2. Asking the buyers to commit to covering the difference in purchase price vs sales price in the event that the appraisal comes in low.
They sound similar right? THERE’S A BIG DIFFERENCE! By way of a recent transaction, let me explain. Representing a great repeat client, the home was listed at $590,000, and we offered $599,000. Another buyer started at $585,000, but had an escalator clause that went to $610,000.
To win the deal, we went to $625,000, with no qualms about appraise-ability at $599K, thinking we might be $10-15K high at $625K. The seller obviously wanted some security in knowing they would get $625K even if the appraisal was low, so we committed to bring in up to $40,000 above a low appraisal, up to the $625,000 offer price.
WE DID NOT WAIVE the appraisal, we just committed up front to how much extra cash we would bring in if the appraisal was low. If it comes in more than $40,000 low, then the buyer can choose to cancel.
If we had WAIVED the appraisal, we would be on the hook for any amount under the value offered, NO MATTER HOW LOW! Now that’s risky!
Well, that’s EXACTLY WHAT HAPPENED! The appraisal came in at $550,000. None of the comps that the listing agent, lender, and I considered most representative of the home’s value were even used in the appraisal report. Had we WAIVED the appraisal, the buyer would have been committed to contribute the entire $75,000 difference between the appraisal and purchase price. But we only GUARANTEED $40,000 over a low appraisal, so we were protected from the other $35,000 under value.
I immediately sent the other agent an addendum for $590,000 ($550K appraisal + $40K guaranteed). The sellers, never expecting an appraisal issue this low, having already waived the appraisal on their purchase, and being through the investigation contingency period, basically accepted $590,000. Lower price for the buyer, lower downpayment for the buyer, lower loan amount for the buyer, lower monthly payment.
Happy Buyer! Who wants to be our next one?