Thank you for your comments and phone calls after last month’s article on downsizing. Gaging the responses I received, the article struck a cord for many local residents. The lack of options is an issue and unfortunately one that is not easily resolved. Lafayette is a wonderful place because there are so many generations of families who stay in Lafayette – we need to ensure that downsizers have affordable options and can remain a part of the community that they have lived in and supported for so many years.
Recently clients of mine wrote on offer on a home that received multiple offers, one of which was all cash. In order to compete with the all cash offer my clients waived their appraisal and loan contingencies despite knowing that there was a good chance the property would not appraise. In the past six months there were very few sales in close proximity to the property that were similar in terms of lot size, square footage, condition of the home and purchase price. The lack of inventory that we have experienced makes finding three sold comps and two pending or active comps in the past six months, which is what lenders generally require, a challenge for appraisers.
My clients made the decision that they were willing to risk making up the difference between the sales price and the appraised value because they loved the home and ultimately because they were tired of losing out to cash buyers who don’t need an appraisal or other buyers who waived the appraisal contingency. Prior to waiving the contingency we went through worst case scenarios and ran the numbers to determine how much more money they would need to come up with based on financing of 80% loan-to-value. An appraisal determines how much a lender will loan a buyer on a given property. My clients were comfortable with the worst case scenario.
We waited nervously to hear the outcome of the appraisal. By law appraisals must be done by a third party who have no interest in the outcome. The appraiser is selected by an Appraisal Management Company. A week after meeting the appraiser at the subject property my clients received a report and were shocked to find out that the property appraised for $210,000 below the purchase price. Immediately we scrambled and ordered a new appraisal that came in three days later at the purchase price. Fortunately, my clients could breathe a sigh of relief and did not need to show up with and additional $168,000 at closing.
Two separate appraisers came up with such different values within days of each other. Often appraisers who are from out of town or who are not familiar with local neighborhoods miss the mark when it comes to local home prices. In this particular case the appraiser who came in low had not seen the comps and was comparing apples to oranges.
Realtor Magazine recently found that the top reasons for closing delays and cancellations involves appraisal issues. The third most common reason for cancellation of a contract is the appraisal – in fact 11% percent of cancellations can be attributed to a property not being valued at the sales price by the appraiser. In 18% of escrows the appraisal is the cause of delays in closings.
As a buyer and as a seller it is crucial to understand the appraisal process and to have a Realtor who can advocate appropriately to ensure that your escrow does not fall through due to a low appraisal. Comps are hard to come by when there is low inventory and it is essential that realtors give appraisers the most up to date info including the number of offers and how many are cash and the condition of the property. Buyers really need to educate themselves on the process and have a game plan for how to handle low appraisals especially because sellers often have buyers in back up and are unwilling to negotiate a price reduction due to a low appraisal.
Please feel free to call or email me your real estate questions or for a free home evaluation. I can be reached at (925) 951-3817 or by email at firstname.lastname@example.org.