The Real Estate Broker's Corner

Hello all. Hope the summer is good for you. We have been moderately busy, and that is a good thing. The market prices have begun to settle down and are starting to make sense, and that is a good thing. Of course, you know I can't just write about the good things, right?

The big issue the real estate market is facing now is appraising, and there are really two facets of this problem; how it affects current specific transactions and how it will affect the future market generally. First, the current transactions.

If you have a home under agreement, you are largely hostage to the appraisal process, and this is where your agent should be able to give you some valuable advise. Let's say you have two offers on your home ( a rare thing these days, but play along), a property you bought 4 years ago for $519,000. The first offer is $500,000 with 10% down, and the buyer is financing through ABC Mortgage, a mortgage broker. The next offer is for $497,900 with 10% down, and they have a preapproval from Bank of America. Pretty clearly, you want the most money, and you say, we accept the high offer, right? I might say not so fast.

The buyer going through the mortgage broker will have an appraisal done, usually by an appraiser selected by the mortgage broker. Since the mortgage broker is not going to service that loan, the servicing bank's underwriters are going to scrutinize that appraisal. (Banks are not exactly in love with mortgage brokers, you see. They blame mortgage brokers for a big part of the subprime crisis). At minimum, the appraisal will be office reviewed by the bank, and it is not all that uncommon today for the appraisal to be rejected and redone by the bank.

The second offer, while a bit shorter, is from someone dealing with the bank directly. The banks generally don't second guess their own appraisers. So the is a fundamentally better chance that the house gets a passing appraisal from the bank originated loan than the mortgage broker originated loan.

That is information the seller would do well to consider. As a broker, I do not want to put my customers in a situation where an appraisal review compromises a transaction. I want one, clean appraisal. What do you think would happen if the bank reviewed the mortgage broker's appraisal, came back with a lesser number, and declined financing? Is the seller happy? Not likely, with an appraisal on record that indicates a lesser value. At best, it turns into a longer process. At worst, the deal blows up. 

There is actually more to this business than hanging a "for sale" sign, you know.

On a macro basis, many properties do not appraise for sale value. The effect of all the foreclosures and short sales is to depress the "comps" that appraisers use to derive value, thus depressing value of appraisal. In addition, many appraisers are running scared. They don't want to be the guy answering the question, "Why did you think this house is worth $500,000?" at a mortgage fraud investigation. Anecdotally, a banker I spoke with last week told me that appraisers he knew were knocking 5% off of what they thought was a good number. the appraisers' new found conservatism is likely to be a drag on the broad housing market turning around. As buyers come into the market and start to actually bid up the values, appraisers will be looking in the rearview mirror. Old sales don't help the appraisal process in a bull housing market, so it will take about 6 months to a year for the appraisers to get up to speed. That is one of the reasons why it is important to work with an agent who has his pulse on the market. The real deals will be had by people who buy before the public recognizes the turn around.

Anyway, have a great day, and give us a call if you are ready to sell your Southcoast Home!