Buyers: Appraisals
Ben & Clint (00:27)
Hey Ben, how you doing? Clint, I'm doing terrific. How you doing, man? I'm doing wonderful. What's our topic for today? Well, I think we're going to talk about appraisals today. The good, the bad, and the ugly.
That sounds like a plan. In fact, we've got a property that we just got an appraisal on today, or should say the appraisal went out today. I was texting with a client before we had to shut him down telling him were recording the podcast about an appraisal and all the ins and outs of it. So it was ironic that that was going on five minutes ago.
I guess I'll start. The appraisal is really a function of the lending process. If there was no lender involved, then it would be strictly what the willing buyer and willing seller are willing to agree to. With a lender, the lender has to confirm that the asset will cover the balance of the loan.
from the borrower in the event of default.
So depending on the loan to value ratio and.
how much money you're to put down with the appraisal comes in at, it's going to determine actually how much money the lender will lend you on the sale. And if it's not enough, then the buyer would have to have to come up with the difference between what the bank would be willing to lend in the typical down payment plus whatever the shortage might be.
Typically, that's the standard thing for government loans, conventional loans, things like that.
In those situations, the normal process is as long as there's financing involved, we get under contract and the bank will order an appraisal and have an appraiser sent out to give their opinion of the value of the property to see whether it meets the expectation and matches up with what the contract amount is.
depending on, well, I don't know exactly what defines it, but there are some properties that all they require is a desktop appraisal and they don't need to send an appraiser out. I've only run across one of those so far in my career. I've run across one also and that apparently is if they get a comfort level with the value relative to the neighborhood and if they can get enough
confirmation on the dollar per square foot applied to the property. think they'll pass it through without the appraisal because they have the comfort level that the loan is covered in the event of default. You one of the questions I get about appraisals, and you and I talked about this earlier, is the seller would always be interested in how much it appraised for. Like, I leaving any money on the table?
The answer is no, you're not leaving any money on the table because the appraisal is strictly a function of the lending component. I tell them, I hope it appraises for a million dollars more than we selling it for because it doesn't matter. It could appraise for a dollar more, the same price, or a million dollars more. The loan's going to go through. So I used to be concerned about what value an appraisal would come in at.
And what to do about it and in today, if it, if we have an appraisal issue, we have an appraisal issue and we we work our way through it. There's nothing we can do about it. We can't pick appraisers. We don't try to pick appraisers. and they come in, if they have questions, we answer them. and it comes in as it comes in and either we can.
Either the appraiser comes in at or above the sales price or it doesn't. And then if it doesn't, we have to renegotiate either the sales price or how much cash the buyer is willing to bring to the table, how much above the appraised value he's willing to pay if anything, or if the seller is willing to go down to the appraised value or something in between it. And we typically can work those issues out. Sometimes we can't.
But typically we can work them out.
You talking about the buyers, mean, sellers being concerned about what it appraises for. And it's not uncommon to have a seller ask, well, it appraised for X number of dollars over what the contracts for. Can we renegotiate the contract? And it's like, no, you've got an agreement. You've got an understanding. This is what we're selling it for.
It's that number is a go no go threshold for us. And that's all we're concerned about. That's, you know, it's an opinion of value. It's not a be all end all statement of value. It's just the lenders agent saying, yes, we think it's worth that much. And it's either good to lend on or it's not good to lend on at that value.
Otherwise we need to figure out how we make the deal close, whether it's the seller going down on the price or the buyer coming up with a little bit of money and a meet in the middle or somewhere there in between.
You know, it also talks about who owns the appraisal. And that's always an interesting conversation. And at the end of the day, the lender requires it. The lender requires the buyer to pay for it. And the lender owns the appraisal. It actually took an act of Congress to force the lenders to
provide a copy of the appraisal that the buyer paid for to the buyer prior to the closing. There were times early in my career where the lenders just would flatten, I'd give the buyers the appraisal, even though they paid for it, they wouldn't give it to them. So it took an act of Congress to change the law. They say, no, you own it, but they paid for it. So the buyer has the right to a copy of it, which is the right thing.
to do. the seller, you know, I tell the sellers if we never have to, if you and I never have to talk about an appraisal, that's good news. I don't care what the appraisal for. But if I don't get a phone call that says the appraisal was less than the sales price, we are good to go. So the upside I really don't care about.
I've seen situations where unfortunately the buyer wasn't happy with their lender post appraisal and switch lenders and the lender wouldn't release the appraisal to the new lender, know, slight case of sour grapes. think the situation was not FHA.
Because in the case of FHA, the appraisal stays with the property for six months as long as it stays in an FHA loan. So the new lender went ahead and covered the cost for the appraisal for the buyer so that they didn't have to pay for two appraisals on the same transaction. The reality is you send two appraisals out, coming back with two different numbers.
I've had one occasion in 30 plus years where two appraisers went out and they came back without a purchase agreement seller wanted the property appraised prior to listing it. And the two appraisers came in to the dollar on the exact same price. They came about a different way, but at the end of the day, everybody looked at each other and we all agreed, well, I guess that's the price. So appraisers do serve a
do serve a purpose. I'm dealing with a transaction right now on property we had listed and there was some questions about what the real value of the property was. So we went ahead and got it appraised. And it's more than some people thought it would be. It's less than other people thought it would be. But we at least have a professional's opinion on what they think the value is. So it does serve a purpose to make some decisions in planning.
I was thinking back, an agent we work with was listing a home for a relocation company and they got it under contract for a specific price. They brought in an appraiser. The appraiser was $100,000 below contract price.
They got a second appraisal. The second appraiser was 20,000 under contract price, 20 or 40. And then the third appraiser was still, I think that one came in over and the relocation company wasn't gonna, I don't know, they don't remember the exact details on it.
But basically the deal fell apart because they couldn't agree on a valuation because there was such a wide range of opinions of value on the property. A lot of times when you have people from out of town with the relocation companies, foreclosures, whatever the case may be with corporate owners, they're inflexible.
When we, when we run into issues with appraisals and inspections. So we just need to know that going in, you know, especially in the foreclosure market, they, I've seen them just dig the heels in and just not adjust the price because they already feel like the price is, is too low. So the appraisal is just another professional opinion of value that has its roots in confirming that the
collateral is there to cover the loan in the event of foreclosure. And, you know, the reality of the collateral, if on the house today, house is nice and clean and new and everything's working and everybody's happy, the sun's shining and life goes on, it closed on the house. And three years, five years, 10 years later,
go back to the house, the house is trashed. nothing's working. The people that lived in it essentially destroyed the house and the lender is wondering, wondering why the value, the current value at that point does not cover the balance of the loan. It's because the asset deteriorated so much. And, you know, if people get in a position where they're going to lose the houses, it's not uncommon for them to
to go out with a bang and do some damage to the house, which I'm not advocating. But the loan to value in my mind really doesn't take that situation into account. If the bank forecloses on a property, it's not going to be in pristine condition in general.
And actually that's something that I've seen and in most cases when you get to foreclosures, I know this is kind of a sidebar from appraisals, but typically on foreclosures the banks don't want to do any repairs. But on quite a few homes over the last six months to a year.
I've seen where the bank has come in and had repairs done to list closer to a retail value to be able to sell it rather than leave it in the condition that it was in when they foreclosed on it. Yeah. And they go through cycles. Sometimes they want to try to get them pristine because they think they can get more money, more return on the investment if they spend some money.
and do it and rehab the house. The problem is they have government contracts with contractors and they try to get it done as cheaply as they can. they still can't get the retail price for it. Early on somebody was saying, and this is generally true. I don't know if I could prove it today, but that a foreclosed property
sold for 88 % of the same house that's not foreclosed on in the same condition. So the bank essentially took a 12 % hit just because it was foreclosed on if it was in the same condition. So that's interesting. All of it's appraisal related because that's why the appraisal is done. on the back end, it's not as clean as it is going in.
So what else do we need to know about appraisals? Well, you can challenge an appraisal, especially a VA. There's a specific challenge to a VA appraisal to follow certain steps if the agent, buyer, lender thinks the appraisal is just wrong. The appraiser missed something or missed a comp or
mismeasured or didn't take into account the value of the lot on the house. There's a specific form to be completed. And I'm drawing a blank on the name of the form, but there's a process to challenge it. And the appraisers sometimes will realize they made a mistake and make the adjustments and things can go forward. And I've seen them just dig in.
So yeah, I made a mistake, but it's not changing the value of the house. And they, they fix the mistake and adjust everything to where the value comes in the same price. So I've seen it done both ways. and those appraisers are either long time that are, that are getting ready to get out or, newbies that are just starting and just don't want to admit they made a mistake.
The appraisal is an opinion, a professional opinion, but it's not the end all. But we have to get through the process. you mentioned VA.
One term, if you're a VA buyer and you have an appraisal done on a home and your agent mentions that the appraiser called Tidewater. That's it. Most people will say, what's that? Well, that means that it's related to kind of like
Chevron and things like that related to a case where it was a challenge on something and basically where the opinion of value by the appraiser was less than the contract price. And so in my experience, when the appraiser calls Tidewater, they generally reach out to the listing agent to validate what comps were used to see if it's valid comps.
and then reassess the value and it may bring it up back in line with the contract price or it may not. But, you know, just, I know when I first heard it, it's like, all right, well, I know the tide water dock down in Golden Meadow but what does that mean in relation to VA loan? Yeah.
Yeah. So I just wanted to pass on that bit of information. And you also, you talked about an FHA loan, the appraisal staying with the property for six months. So we generally have a conversation with the sellers when we get into an FHA situation. I think it's the same thing for USDA rural.
development.
to let's make sure we're comfortable with the price and that we think it's going to appraise because if it doesn't and we can't overcome the gap, that appraisal will apply to your house for the next six months on an FHA loan. So I've had some people surprised by that, not happy about it, but we try not to let that happen to where they know that the appraisal is coming out and if they...
If it comes up short for whatever reason and we can't get it up, then that appraisal is going to be on that house for the next six months for the subsequent FHA loan. So we know we have a problem. If we can't make a deal on this one, I don't know how we would make a deal on the next one because we'd be using the same appraisal. So just all the idiosyncrasies of the appraisal process and
You know, it's relatively easy. The bank's going to order the appraisal. The appraisal's going to go out, do their inspection, go home and do their work, magic and produce a report and send it to the bank. All that's nice and neat and clean until it's not. So when it works, it works well. When it doesn't work, sometimes we can fix it, sometimes we can't.
here's to making it work more than we can't Yes, we try. We certainly try. We fix more of them than we don't. And that's part of what we do. We, I tell people, psychologists, marriage counselors, financial planners, we're a little bit of everything during the transaction. It can be highly emotional and it's our job as agents to
calm the emotions down and make sound rational decisions and not inflame the situation. I've seen some people, some agents come in and just get everybody cranked up. And then I've seen some agents walk in and just calm everybody down. And that's what I try to do. I try to just kinda, let's sit down and talk about it. We might not like it, but let's talk about it.
see if we can come up with a solution that everybody can live with.
All right. I think we've pretty thoroughly covered appraisers. Yeah, I think we beat them up pretty good, that's, no, we didn't beat them up. We covered everything, I think. So it's a side of appraisal that a lot of people don't see. So hope y'all enjoyed it. Yeah. Looking forward to the next one.
Alright Clint, have a good one. You too Ben thanks. See y'all.
Creators and Guests
