Tag Archives: appraisal

Things That Can Derail Escrow

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After all the trouble of putting a house on the market, showing the house to numerous buyers, and then going through several rounds of negotiations, a deal has been reached and the house is in escrow… what could go wrong?

The short answer is, plenty.  Escrow is a complicated process with many participants and equally numerous moving parts.  At the helm of it all should be the Realtors on the transaction guiding the deal to close for both the buyer and seller.  In my experience, the three biggest derailments of escrow are as follows:

1)   Financing & Appraisal

Next to having an experienced real estate agent, having a trusted and seasoned lender on the buyer’s side is vital to a smooth closing.  A lender should always advise buyers to withhold major purchases on credit during the home purchasing process.  Additionally, a diligent lender should proactively assist the buyer in fulfilling the underwriting conditions and have the buyer lock in a mortgage rate in a timely manner.  An essential piece of lending success is dependent on the appraisal coming in at the agreed upon price.  Should that not be the case and the property is under valued, then escrow is at serious risk unless the buyer and sellers can find a solution.

2)   Inspections

Nearly every real estate deal in current market conditions requires a physical inspection of the property.  When a buyer is handed an inspection report that itemizes things that are wrong with the house, from big items to little, it certainly can intimidate the buyer from proceeding.  A lengthy report from the buyer’s perspective is equivalent to excess expenditures and additional headaches for the buyer.  At this juncture, another round of negotiations could take place requesting the seller for repairs or adjustment to the price to cover for repairs.  If negotiations don’t result in a meeting of the minds, then escrow could be in jeopardy and the deal may fall apart.

3)   Disclosures

During the escrow process, the buyer is handed a list of disclosures.  While representing the seller, I tend to advise on disclosing more as opposed to less.  But it can be a little much for the buyers to digest depending on the severity of the disclosures.  The last thing anyone wants to happen is for the buyer to think that they were deceived and that the seller wasn’t forthcoming regarding the property.  Regardless, many deals have not come to fruition over items in the disclosure packet or that buyers discovered items that were not disclosed and therefore become suspicious about the property’s shortcomings.

Other issues that can derail closing include:

  • Termite inspection reveals serious infestation.
  • Title search reveals liens and clouds on title.
  • The house is uninsurable.
  • Closing is delayed due to errors, contingencies or missing documents.
  • Either the buyer or seller simply experiences a change of heart.

The good news once again is that if you have engaged an experienced Realtor to represent you, he/she will likely be have previously faced similar issues on another transaction and be able to help you navigate your way to a successful close regardless.   Whether it’s negotiating a request for repairs or connecting the buyer with a diligent lender, your real estate agent is your strongest ally towards a smooth close of escrow.

Appraisals – Part II

Appraisal Report

After a few rounds of counter offers and negotiations, buyer and seller agree on a price and the home goes into escrow. Time to celebrate? No, not just yet unfortunately. Within the escrow process, there are several hurdles to overcome, one of which is the appraisal. As we mentioned in last week’s post, appraisals are a critical component of the lending process. A low appraisal can derail the agreement reached by the buyer and seller.

Low appraisals can arise in a declining housing market due to the lack of recent comparable homes sales, making it difficult for appraisers to determine the current market value of a property. When home sales slow, good comps “age” fast. Comps of homes that sold over six months earlier generally become obsolete data and aren’t factored in the valuation. Add foreclosures and short sales to the equation and appraisal values can vary greatly depending on the appraiser’s methodology. But, low appraisals can also occur when the market is rising rapidly as appraisers may have a hard time adjusting their valuations to account for escalating market value.

The reality is that appraisals are conducted by independent 3rd parties hired by the buyer’s lender. Legislation requires lenders to use an intermediary entity who then in turn selects the appraiser, ensuring that the lender and the appraiser have no conflict of interests. The regulatory intent is to have the appraisal be as impartial as possible. So it’s not at all possible for the buyer or the seller to choose who performs the appraisal. However, if you have a knowledgeable and seasoned real estate agent representing you, he or she can be instrumental to the process. Here’s how:

  • Your real estate agent would never want his/her client to overpay for a house so chances are, during the negotiations process, he/she will be facilitating the negotiations towards fair market value, already mitigating the chances of a low appraisal report.
  • Your real estate agent presumably is an area specialist so he/she should be well-studied in the specific neighborhood of the home so that he/she might drawn upon nuanced knowledge of schools, community and other neighborhood desirability details that can be shared with the appraiser.
  • All reputable real estate agents will attend the appraisal at the home and provide a package of most relevant comps to the appraiser.
  • In addition, the agent could have knowledge of off-market home sales in the area that can impact the appraisal or conversely have knowledge of recent foreclosures and short sales that should be exempt from the valuation.

Good agents are keen to the fact that appraisers tend to draw their comps straight from the MLS but that data collected may not represent the clearest picture of market activity and value.

And should the appraisal return a lower value than the negotiated sales price despite the diligent efforts of your agent, here are the buyer’s options:

  • Negotiate a new price – sellers may entertain a lower sales price as a low appraisal is a blemish on their home should they have to put the house back on the market, or there could be other circumstances at play like the purchase of the next home contingent of the close of the current home that might increase seller flexibility.
  • Put more money down – if feasible, buyers can always bridge the difference between the loanable amount with cash.
  • Hire a new lender – a new lending entity will restart the process potentially with a new appraiser.
  • Cancel contract – contracts are typically written with an appraisal contingency to protect the buyers from having to follow through on the heels of a low appraisal.

Under any of the circumstances above, the thing to avoid while navigating the pitfalls of a low appraisal is letting the appraisal contingency period expire or else the buyer is locked into the transaction.  Again, your real estate agent should be well aware of the contingency period and would never allow the period to expire.  A seller benefits from a mutual resolution so typically they will grant an extension while the buyer vets all options.

Whether you are the buyer or the seller in a low appraisal situation, your seasoned real estate agent should be guiding you through the entire process and see you through its resolution.

Appraisals Explained

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Appraisals are a critical component of the lending process.  In any home sale/purchase transaction that requires financing, the lender will mandate an appraisal on the property.  So what exactly is an appraisal?

Often confused, a home appraisal is a separate analytical report from the home inspection.  An inspection identifies potential physical issues with the house to prevent costly repairs down the road.  An appraisal is a third party expert opinion on the current value of a piece of property.  Lenders rely on the appraisal report to ensure that they are not over-loaning on a property.  In the event a borrower defaults on the mortgage and the property goes into foreclosure, the lender recoups the money it lent by selling the home.  If the bank loaned above the value of the property, then the lender is unlikely to recoup their investment.

An appraiser is an independent and objective third party who does not have any financial stake in the transaction apart from his fee for performing the appraisal. Appraisers are state-licensed and work in regions and neighborhoods they are familiar with so they have an expert knowledge of any environmental or other concerns that may affect the value of a property.  Typically, the homebuyer pays for the property appraisal when applying for a home loan and the cost varies greatly depending on the size of the home and the experience of the appraiser.

There are two basic methods of appraisal used for residential properties. First, there is the sales comparison approach whereby the market value of the subject property is determined via “comparable” analysis.  The appraiser typically visits the home in question and obtains specific home information and statistics and then compares the data with “comps,” properties of similar kind in the same geographical area that have recently sold.  The second method is the cost approach, which evaluates value by determining how much money it would require to replace the property if it were to be destroyed.  This approach is more commonly used in evaluating new construction.

The appraiser gathers information for the appraisal report from a number of sources, but the process always begins with a physical inspection of the property inside and out.  Additionally, the appraiser may look at county courthouse records and recent sales reports from the multiple listing service. The appraisal report typically includes:

  • An explanation of how the appraiser determined the value of the property.
  • The size and condition of the house and other permanent fixtures, along with description of any improvements that have been made and the materials used.
  • Statements regarding serious structural problems, such as water damage and cracked foundations.
  • Notes about the surrounding area, i.e. proximity to schools, new or established development, lot size, relevant aspects affecting desirability and resale, and so on.
  • An evaluation of recent market trends of the area that may affect the value.
  • A comparative market analysis that supports the appraisal including maps, photographs and sketches.

Next week we will discuss how to prepare for an appraisal and what happens if the appraiser returns a value lower than your contract price.