Question regarding housing market: appraisal value vs. sales price (Cary: comparable sales, 2014)

[katestar]

We started searching for a home and have decided on the Cary/Apex area. Met with a realtor today and my question to her was if the market is so hot, how have prices stayed relatively steady (without exponential increases like seen in some areas). She said that since the great recession, lenders will no longer loan out amounts greater than the appraisal value. So, for example, house is listed at $250K, appraised at $220K. The options are to put down $30K (which is more than a typical 5% down on a conventional loan), or to go back to the seller and have them come down. She said that specifically in the Cary/Apex market, folks have not been offering the extra cash to "bridge" the appraisal value and asking price, so prices have risen but not exponentially. Anyone have first hand comments about this?

Also, I am looking at a house in Apex. It is listed at $265K. Great everything, new carpet, amazing layout, upgraded kitchen, great location etc. I see that it's tax value is $205K. Zestimate (which I know is not accurate) puts it at $232K, it was last sold for $230K in 2014. It is priced about 20% higher per square foot than comparable recent sales. So seems like to me the appraisal will come in lower than $265K, maybe $240K. I have two questions: (1) does it make sense to come in and add extra $25K cash to get all the "upgrades" (2) it seems that if all this is true, making upgrades doesn't make sense - meaning you won't recoup the money you invest since people aren't putting up the cash according to my realtor. OR, I'm totally missing everything here. Someone please educate me!! TIA.

[MikeJaquish]

1. Banks have never lent above appraisal. That is an odd statement, to say the least.
IF you are putting down 20% and expecting to borrow 80% LTV (Loan To Value), the bank will lend 80% of their appraiser's opinion of value.
IF the $265,000 house appraises at $240,000, your loan will be $192,000 and your down payment would be $73,000.
That is pretty much how it has worked historically.

2. Tax assessment is not an indicator of market value. Zillow is not, either.
If the house sold for $230,000 in 2014, and you build in 2.5% appreciation for two years, appreciation alone puts you just over $241,000.
Did the sellers do any improvements that add value? Is 2.5% an appropriate number? Are the comps directly applicable, or are there adjustments to be made that would buoy the value of the subject property?


3. Yes, many other markets are insane, where we are just a bit nuts here. And other markets are dead. It is all local. A lot of available new construction helps restrain resale pricing, but we are still seeing increases in value.
I closed one last week that sold in 2012 for 90% of what it sold for last week, so my sellers gained nearly 11% in under 3.5 years, without doing much to the house.
Slow and steady wins the race.

[cheapdad00]

Originally Posted by MikeJaquish

1. Banks have never lent above appraisal. That is an odd statement, to say the least.
IF you are putting down 20% and expecting to borrow 80% LTV (Loan To Value), the bank will lend 80% of their appraiser's opinion of value.
IF the $265,000 house appraises at $240,000, your loan will be $192,000 and your down payment would be $73,000.
That is pretty much how it has worked historically.

Or the buyer goes back to the seller and says, "my bank thinks this house is worth $240K, lower your price so it is in line or I am walking." Or you try to arrange funding through a different entity and hope their appraisal comes in higher. Or the seller's agent, hoping to preserve the higher sale price, tries to point out to appraiser that there are more pertinent comps that should have been used which support the higher price.

[RedZin]

Originally Posted by cheapdad00

Or the buyer goes back to the seller and says, "my bank thinks this house is worth $240K, lower your price so it is in line or I am walking." Or you try to arrange funding through a different entity and hope their appraisal comes in higher. Or the seller's agent, hoping to preserve the higher sale price, tries to point out to appraiser that there are more pertinent comps that should have been used which support the higher price.

Or, the seller isn't in a hurry and waits, thinking that the appraiser isn't a very good one, and knowing they had it appraised before putting it on the market, and an appraiser they trusted came in 15k higher than the potential buyer's appraiser, so they just let the buyer walk and wait to get what they want.

If the numbers are THAT CLOSE, I doubt anyone will jump on a buyer for a property in that price range, because those properties are a little on the hot side if they are in good condition.

I mean, a 15-20k difference is a lot when a house is in the 250k range. If the house was 900k, I would imagine a seller might be more likely to just drop the price or split the difference to get it sold and done with.

But, it's a way lower percentage of nearly 1 mil than it is of 250k, that 15-20k in selling price, no?

[MikeJaquish]

Originally Posted by cheapdad00

Or the buyer goes back to the seller and says, "my bank thinks this house is worth $240K, lower your price so it is in line or I am walking."

The table ante for that gambit in this market on a $265,000 home runs in the $1200--$2000 range between DD Fee, Appraisal, inspections, and the buyer is usually drawing to an inside straight.

Originally Posted by cheapdad00

Or you try to arrange funding through a different entity and hope their appraisal comes in higher.

And, you have to hope that the seller who likely had multiple offers will agree to extend the DD Period while you pursue another appraisal and approval.

Originally Posted by cheapdad00

Or the seller's agent, hoping to preserve the higher sale price, tries to point out to appraiser that there are more pertinent comps that should have been used which support the higher price.

BTDT and understand the point and know the likely frustrations. Getting an appraiser who has made even a grievous error to revise an already stamped and submitted appraisal is extremely difficult, and that alternative is not a great plan to support making an offer on a house which the buyer feels is overpriced. It is very difficult to advise a buyer to proceed under the assumption that an appraisal can be corrected.

As a strategy:
Buyers need to go to contract at a market value that they can support with some logic and based on comparable closings, possibly making some assumption of a still ascending market to support a price slightly above those comps.

[katestar]

Thanks everyone. I am learning as I go. My main concern is we find a house we like, but it appraises for $20-30K less than what the seller wants. From my understanding we would then have to negotiate with the seller to come down or come up with $10-20K cash. I am trying to spend as little cash as possible, but I also want to get THAT house that fits our criteria etc. Another concern is resale value. If we pay the extra $25K over market value now, will we be able to sell it at some point without losing money.

[MikeJaquish]

Originally Posted by katestar

Thanks everyone. I am learning as I go. My main concern is we find a house we like, but it appraises for $20-30K less than what the seller wants. From my understanding we would then have to negotiate with the seller to come down or come up with $10-20K cash. I am trying to spend as little cash as possible, but I also want to get THAT house that fits our criteria etc. Another concern is resale value. If we pay the extra $25K over market value now, will we be able to sell it at some point without losing money.

Your agent should be running comparable sales with reasonable adjustments to support any offer you make. Don't make an unsupportable offer, and 10% deviation from reality is pretty much unsupportable. Generally, if the offer is supportable, you will get a full appraisal.
Now, if an appraiser makes an error, that is very difficult to overcome, and it does happen.
Don't expect that a seller in this market will come down $20,000 to compensate for appraiser error.

[katestar]

Originally Posted by MikeJaquish

Your agent should be running comparable sales with reasonable adjustments to support any offer you make. Don't make an unsupportable offer, and 10% deviation from reality is pretty much unsupportable. Generally, if the offer is supportable, you will get a full appraisal.
Now, if an appraiser makes an error, that is very difficult to overcome, and it does happen.
Don't expect that a seller in this market will come down $20,000 to compensate for appraiser error.

Hmmm OK. I will talk to the agent some more about this. Do we get to pick the appraiser? And, if we feel the appraisal was wrong, can we get another one?

[MikeJaquish]

Originally Posted by katestar

Hmmm OK. I will talk to the agent some more about this. Do we get to pick the appraiser? And, if we feel the appraisal was wrong, can we get another one?

You do not get to pick the appraiser. The appraiser is the lender's appraiser. You are just paying a fee to cover the lender's cost of appraisal.
You do not get to get another appraiser for the same loan application.


And, definitely, to be clear... Appraisal errors are not rampant. You just need to know they are human and that it is not a perfect system, and no one can eliminate all risk from your transaction for you.

[adamwmcknight]

The lender orders an appraisal. Its purpose to support their loan to you, to ensure it is not unsubstantiated or unsecured. When they place the order, it goes into a queue. The appraisers in that queue will grab it. This is intended to prevent conflicts of interest.