Tuesday, April 22, 2014

Appraisals May Stop You From Buying A Home

Earlier this month I was quickly on my way to closing on my third rental property when something unique happened: the appraisal came in for the purchase property.  That's not unique at all.  Obviously an appraisal has to be done so that the bank can justify their lending.  What was unique (to me) was that the appraisal of the purchase property, a 3 bedroom 2 bath home in the Memphis, TN area, came in significantly low.  Like $17K low.

The sales price was $87K and the property appraised at $60K.  It's bad news for you as the purchaser and borrower, on both ends, when an appraisal comes in too low.  For one, the company/wholesaler selling you the property will not agree to lowering the price of their property when it is so far to the low end.  Second, the bank will not budge at all in changing their new ceiling on your loan.  If it appraises at a certain amount, that's what the bank will finance at.  Instead of getting 20% of 87, I was now offered 20% of 60!  And I could not put in more of my own money to meet the selling company close to their sales price.

What are your options at this point?  In your favor you have the company not willing to sit on a property for too long.  Like you, they want to move quickly so that they are not carrying the note they have in their books for the property longer than they need to.  Option one is simply to go with another bank.  This was not what I wanted to hear.  My original loan was already in underwriting.  I had spent considerable time gathering all of the documents banks need to underwrite your loan (copies of income tax returns, W2's, bank statements, etc.).  Option two was to scrap the deal altogether.  I did not want to do this.  You may be asking, isn't there a continuing risk of another appraisal coming in low?  Yes!

I have worked with Meridian Pacific Properties on two other deals.  They are a reputable company and I trust their judgement.  They were sure the appraiser made a mistake, not taking recent comparables closer to the subject home into question.  Similarly, I have an interest in the property appraising higher as well.  I want to make sure what I am buying is worth the price.  We went with another bank.  Things are looking good right now.  I was lucky in that my paperwork was secure emailed to the new bank, so that I did not have to spend additional hours gathering and copying my financials again.

Here is the lesson I learned this time out:  

Appraisals are now independently done.  Banks do not have appraisers on staff.  Appraisals are ordered and the appraisers are selected randomly, and blindly.  This means you stand just as much of a chance of getting an appraiser with 1 year of work experience as one that has been on the job for 10 years!  

All this is due to new banking regulations.  You see, before the real estate bubble burst, appraisers were in cahoots with banks and sellers, getting steered into appraising properties at the list price or even slightly higher...NEVER lower than the list price for fear of losing business.  

Things have changed!  Appraisers are independent contractors now and they could care less on what you need.  They will do their appraisals with no repercussions, even if they are wrong!  Worse part, you can't ask for an experienced appraiser to go out to the home you want to buy.  You get who you get.

Bottom line: There is a new monkey wrench in the system when purchasing a property, whether you are buying to rent or reside in.  Good luck!

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