Double Double Toil and Trouble: Conjuring Up Spells to Get to the Closing Table
We all know that the HVCC (Home Valuation Code of Conduct) has changed how appraisers are engaged, leading to the hiring of professionals who are not as familiar with the Manhattan market. More often than not, this change has resulted in lowered (you might say bewitched) appraisal values, for the most part, putting both buyer and seller in an interesting predicament.
We've come across several such situations where sellers believe that the buyers must come up in price, and that they have no choice in the matter as if entranced. This is simply not true, especially not when 98% of loans extended are mortgage-contigent. We are living in different times, my friends.
So what are the choices that both parties have if the appraised value comes in below the contract signed price?
Buyers:
1. Come up in price by that difference between the appraised and contract numbers, that is, if you want the property badly enough or if there are other bidders breathing down your neck
2. Pay for PMI to lower the 20% downpayment threshold, resulting in a one-time lump sum payment and higher monthly premiums. Here, try to negotiate with the seller for a concession towards that lump sum.
3. Renegotiate the contract price to the appraised value
4. Walk away altogether by getting a declination letter from your bank. This document basically states that the bank is not willing to extend you financing based on the previously-agreed-upon price and loan to value, making the contract null and void.
Sellers:
1. You can reduce the price of your property to the appraised value; this is where you need to manage your expectations throughout the process. Just because you have a contract signed close to ask, doesn't mean it will close for that much.
2. Reimburse the PMI lump sum via a concession at closing ... at least you're meeting the buyer part-way.
3. Let the buyer go, and cast a spell for an all cash buyer to come your way before the next full moon. Be very careful here; unless you happen to be in the lucky position where you have other buyers who have not yet left the table despite the contract being signed, you would be starting the process all over again. Though all-cash buyers do exist, you would need some pretty strong bat whiskers and mummified toenails to create that magic upon request.
As always, we'd love to hear from you on both sides of the transaction. What have you seen and, perhaps more importantly, which choice would you make?
Comments (9)
I find it interesting that "outside" appraisers are being blamed for lower appraisals. It may be that these outsiders are offering better, more objective assessments. The former insiders may have been too involved to provide objective analysis and are too heavily anchored on previous assessments. There is a possibility that many appraisers were perversely influenced by other interested parties like brokers or aggressive loan officers. In the boom, many facets of the system became either sloppy or corrupted. Maybe an objective eye is useful in some respect, but I do understand that the nuances of the locality may be lost.
Whether or not the new appraisels are fair, I think that properties that rely on heavy financing will have a ceiling to on market value equal to what lenders believe the value to be.
Posted by Anonymous | December 1, 2009 10:53 AM
Anon - I wouldn't say they're "blamed" per se - rather that there has been a correlation; not wrong or right, but a relationship nonetheless.
Indeed, I agree regarding the possibility of undue/shady infuence on appraisers to adjust valuations as needed. (I have heard of instances where it was as simple as offering the appraiser $500 and, voila, the appraisal value just jumped 10%.)
In speaking with a mortgage professional regarding situations like this, he suggested that the buyer speak with the appraiser to show him how the value of the asset should not be based on comps, rather on what someone is willing to pay --- isn't that what we write about, after all? ... that all the calculations in the world mean nothing (to some extent) and that the value of a property is determined by what the buyer is willing to pay for it?
My question to the mortgage professional was then: "So what's the purpose of an appraisal, then, if it's all based on the buyer?"
His response: "Good question"
Posted by Ana Maria | December 1, 2009 11:10 AM
It is all about what someone is willing to pay. It just can't be based upon what one or two persons are willing to pay. Maybe the buyer could introduce some factor exogenuous to the appraisal model that drives value, and subsequently the model can be refined. However, this factor should be valued more generally by the market, not just the buyer, which may be hard to prove, especially to a non-local.
Posted by Anonymous | December 1, 2009 11:26 AM
I'm not quite sure what you mean (you note that it is about what someone's willing to pay yet not just one or two peopel) ...
If we agree that value is defined by what someone is willing to pay (as you mentioned), then doesn't the fact that you have a signed contract reflecting that price theoretically prove that point and therefore set that value?
How many people does it take to agree upon a value, thereby defining it?
Posted by Ana Maria | December 1, 2009 11:47 AM
I agree that the market value can be dictated by that contract. However, that value could be a little shaky if the transaction is cannot be repeated, i.e., the contract value is determined by an outlier. The bank needs to know with some assurance what the property is worth if it were to be resold, or what others are willing to pay. If certain factors are valued by a substantial number of other market participants, then a valuation based on that factor is more reliable. I wouldn't propose any specific number of other buyers, but think of it as in any other data sample. One data point, the contract, is not broadly informative. However, with a increasingly large data set, an increasingly more reliable confidence interval can be placed around the value.
P.S. - I'm not saying anything about how it is done in practice, just proposing a thought process that I find logical.
Posted by Anonymous | December 1, 2009 12:02 PM
Got it - thanks for the clarification, Anonymous
Posted by Ana Maria | December 1, 2009 12:10 PM
Isn't it what someone is willing AND able to pay? The essence of price discovery is finding out what one can afford. Folks could "afford" a lot more on the way up, so, prices trended way up. I think the dirty little secret is we haven't seen the market truly absorb the time it will take to move a property over the medium term, absent a highly liquid mortgage environment for jumbos. I just looked at a condo that is for sale and rent; if you paid what the seller wants, and rented for the same, your going in return on equity would be -5.5% (yes, that assumes a 40% income tax rate on interest deduction). That's before repairs & insurance and does not include an adjustment for opportunity cost or inflation. Adding those costs in, the negative carry could easily approach 8% to 10% which means that in order to break even on the deal, the asset would have to appreciate 2% annually. Theoretically, I guess, it could happen but it drives home the fact that ownership in Manhattan is still very expensive relative to rent. Buyers need to ask themselves the question if a Bank is only willing to value something at $x, why would it be "worth" more? The buyer's market cycle is just beginning.
Posted by Fred | December 3, 2009 9:56 AM
I was a buyer whose appraisal came in low. I really didn't think too hard - probably because I'm a US expat currently living out of the country, and I had a very limited time frame in NYC itself. I went ahead and paid the bid price. I'm buying for the long-haul though, so I think over the years, I'll be OK.
I do wonder what would have happened if I had held out for the appraised value, or paid only a small premium.
Susan
Posted by Susan | December 7, 2009 4:05 AM
Do you mean if you had negotiated with the seller? What did the seller say, by the way? And did you have a mortgage contingency in your contract?
Posted by Ana Maria | December 7, 2009 11:59 AM