Residential Real Estate Appraisals: What Are They and What Do They Do?

If you purchase a house with a loan, the lender requires an appraiser to assess the property and make sure that the market value is there.  In other words, if you’re buying a house for $500,000 the bank wants to make sure the house isn’t worth only $200,000 and that they’re lending you $300,000 of extra money.  Sounds legitimate.

The problem arises when the discussion of market value comes into play.  Buyer writes an offer.  Seller counters.  Buyer agrees.  Buyer and Seller have to come to an agreement about what the house is worth.  To many people, that is the definition of value: “what someone is willing to pay”.  The trouble is that that isn’t necessarily market value.  If the same floor plan just sold 3 weeks ago as the property-in-question for $300,000, and today Buyer and Seller agree to purchase the same floor plan for $310,000 in a declining market, the market value may come in less than $300,000, depending on a variety of factors (interior upgrades, lot size, etc).  Market value isn’t an exact science and appraisers are licensed in using a bunch of determining factors to calculate value (i.e. a larger house that’s a little bit older than the property-in-question and has a pool sold 0.25 miles away 3 weeks ago.  How does that affect the market value of the property-in-question?).  Appraisers use a variety of tools in order to determine how each item affects the value as well as take into account trends within the local and national market.  The main thing to remember is that the appraiser works for the bank.  The appraiser’s job is to protect the bank’s interest and make sure there isn’t any loan fraud or other potentially illegal activity going on.

The lending pendulum has swung from the liberal times of the mid 2000’s (when people making $10/hour could afford $500,000 houses) to the very conservative.  Appraisals have come along with that.  Used to be that lenders and appraisers had relationships and Dave the Lender could call up Tony the Appraiser and have him appraise the property.  Of course, Tony appreciated the business from Dave and therefore was more inclined to make things work and have the property appraise at value.  Now, appraisals go into a hat and a random appraiser is selected.  Seems better but the problem sometimes is that you get an appraiser who potentially isn’t familiar with the specific neighborhood.

The second biggest problem with appraisals is that the appraiser is given the contract.  From the sense of putting deals together it makes sense but for determining market value it doesn’t make sense.  I’ll tell you a quick story regarding a recent house I sold at 3120 Skyline Drive in Oceanside.  The buyer wrote an offer at $800,000 and the seller countered at $825,000.  The buyer agreed.  We went into escrow at $825,000.  However, the appraiser received the contracts from the lender (remember, the appraiser works for the lender) but only got the offer at $800,000 without the counter.  He appraised the property at $800,000 (surprise, surprise).  He thought he was making the property appraise at value.  Actually we were undervalued.  My client (the seller) brought up a valid argument.  If the appraiser is only going off the contract, what’s the point?!  It’s a valid argument.  The appraiser’s job is to determine the market value of the property.  At the same time, he doesn’t want to be the one to screw up everyone’s deal (FYI — appraisers get about $250-$300 take home per appraisal.  Lender fees are about 1% of the purchase price.  Realtor fees are about 3% of the purchase price per side.  Etc, etc).  You can see the dilemma.

Appraisers have one of the toughest jobs within real estate.  Often there are qualified buyers who are agreeing with motivated sellers to buy a house at a specific price and the property falls through because it doesn’t appraise.  At the same time, difficult properties to appraise (i.e. property different than surrounding properties) draw increased scrutiny from the appraiser’s boss (aka The Underwriter).

If you run into trouble with appraisals, there are ways to combat them.  Give me a call or drop me an email if you run into trouble and need some help.

Writing an Offer: How Much of a Discount Should I Write the Initial Offer at?

Watterson had it correct in this Calvin and Hobbes cartoon, and dealing with the compromise and negotiations of an offer can be difficult.  The question in the title is a common one I get from buyers.  The house is listed at “such-and-such” price.  What should we write the initial offer at?  10% off the asking price?  More?

The thought is that there is some kind of formula which will allow you to get the best deal.  However, the most important thing to note is that the offer you should write is based off the market value of the home, not the price it’s listed at.  In other words, if a house is worth $400,000 and it’s listed at $500,000 a 10% discount off the asking price would still be over paying for the house.  On the same token, if the same house is listed at $375,000 there is no need to go in at a discount because it’s listed at a discount.  Learning market value is key and discerning the features that may add or subtract value is extremely important.  Now, just because a house is worth $400,000 (market value) doesn’t mean it’s worth that to you.  Maybe you aren’t totally in love with it but at the right price it would make sense and the best price for you is $375,000 no matter what.

In writing the initial offer I generally work under two strategies, each with their own advantages and disadvantages I’ll discuss:

1) Write an offer that’s strong enough that it doesn’t piss the seller off where they don’t respond, but low enough that you create some room to negotiate.  Let’s say the house is worth $400,000 and it’s obvious (i.e. it’s a tract home with a model match of similar upgrades that sold two weeks ago at $400,000 with no difference in view, lots size, location, etc etc).  The first strategy is have your Realtor do some background work.  Why is the seller selling?  What’s their motivation?  Did they get a job transfer and he’s leaving in two weeks or are they just testing the market?  What kind of activity have they had on the house?  Any previous offers?  Any offer now?  Anything we should know about the property before writing the offer (i.e. seller wants to take all the appliances or that the seller will credit for a carpet allowance)?  Identifying these things will help with the initial offer.  With that information I make my recommendations as to what the initial offer should be.  If the seller has a job relocation and needs to sell it, maybe we start at $370,000 and hope we split the difference around the mid $380,000’s and can feel like we’re walking into equity.   Sometimes this happens where the buyer writes the offer at $370,000 and we end up splitting it right down the middle and go into escrow at $385,000.  The common complaint is, “Had I known we were going to split it 50/50 I would’ve started lower.”  Makes sense but remember it’s based off market value not the initial offer written.  If that was the case then we should’ve written the initial offer at $1 and the seller would’ve split the difference and we’d be in escrow at $200,000 right?  Wrong.  Thus, the biggest challenge of this style of offer writing: writing the initial offer too low.  Same scenario but the buyer writes the offer at $350,000 and the seller rejects the offer outright as an insult or ridiculous.  Now, as a buyer you’ve put yourself in a tough spot because you need to go back to the seller and increase your offer.  Now it looks like you really want the house and you’re begging for it.  Not exactly the way you want to start out with negotiations.

2.  The second style of offer writing is the “highest-and-best” tactic.  For the scenario above, this would be like writing the offer at $385,000 and holding firm on it.  You go in relatively strong and back it up with data and explain that this is the best you will do.  The biggest part of this is that you have to stand firm.  The seller will probably test you and may even become frustrated with you because it’s such a power play.  Usually when I write these kinds of offers with clients the seller doesn’t agree to it because of the lack of negotiations and 4-6 weeks later I check in with the listing agent and say that the offer still stands (if we haven’t found something else) and we’ll go into escrow.  Psychologically it’s tough on a seller to deal with this kind of offer because everybody wants the game.  I’ll give up this if you give up that.  The biggest challenge I find is two-fold for these kinds of offers: 1) is the challenge that a seller may pass on a legitimate, good offer because of the lack of negotiations and 2) is the susceptibility of the buyer to not stand firm on their offer.  If you go in and say that $385,000 is your highest-and-best, “take it or leave it”, and the seller counters at $387,500 what do you do?  It’s a difference of $2,500.  Are you willing to let the deal fall apart over $2,500?  But are you willing to enter a more challenging escrow from the beginning because what you originally said was highest and best really isn’t?

When it really comes down to it I think one of the biggest advantages of having a Realtor is having a qualified person who has been through the process many times to bounce your ideas off.  If you just want an order-taker anyone can be your agent.  If you want someone that can help you get a good deal through the negotiations, give me a call.

Finding the Best Deals From Builders/New Construction

In this market the key to finding the best deals is all about timing.  Finding a home where the owners need to sale but have equity is the best chance to buy something well under market.  The same goes for builders of new construction.  They purposely try to limit supply and keep demand (and prices) high.  The economy is definitely a factor, but even in a good economy the builder doesn’t want to just dump 85 units all on the market at the same time.  So, they do it in phases.

The key is timing in the phases.  If you’re buying the first home for sale by the builder you have to understand that the sales price that goes for is going to be the basis for all other sales.  If (at the end of all the phases) there are 85 homes for sale and the first house goes for a 10% discount, every sale after that is going to have to be close to that discounted price because every other buy should be aware of the sales price.  Builders blow out the units at the end.  If they’re selling units 83, 84, and 85 of 85 total, that’s when you go in aggressive.  And when I say aggressive, I mean aggressive.  Ask for upgrades, closing costs, AND a 10-15% discount.  To have the showroom, models, sign-twirler and whole dog-and-pony show going on, the builder is paying money.  Many times the builder is more interested in closing out the project and taking the flags down rather than haggling for another $5k-$10k.  Go in with a strong down payment or at least highly qualified, and walk yourself into equity.

New to new construction, or don’t know where to start looking?  Feel free to contact me.