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How Appraisals Are Affecting Today’s Market

Renovated South County KitchenThis is by far the most exciting Real Estate Market we have been a part of in nearly 10 years.  For a long stretch of time agents were seeing seller after seller get beat up from overpaying during the bubble, but sellers have seen appreciation and the ability to “step up” and purchase a more expensive home.  We are even seeing buyers with marginal credit have the ability to afford homes with close to 0 down by taking advantage of Beyond Housing and MHDC Programs.  Healthy housing growth leads to a healthier economy and a healthier economy leads to lower unemployment.

It’s not all fine and dandy for both side of the transaction.  Buyers and sellers are facing hurdles even though home prices are on the rise.

Sellers: What Are The Challenges Faced When Selling/Buying?

Most of the time sellers are in the driver’s seat.  What do I mean by this?  Well let’s break down a Sellers Market:

  • Inventory is low: Many of the people that have purchased from the tail end of 2008 to the first quarter of 2013 were able to lock into interest rates below 4%. Sellers fear “will I be able to get the same or a similar rate for more house”?
  • More buyers: There is a large pool of buyers these days with Millenials joining the job force, more are becoming savvy about wanting to invest their money into owning a home.
  • Borrowing Money:  Money is cheap now.  The average buyer can get a rate of 3.75-5% on a 30 year note with FHA/VA/Conventional/Jumbo Programs.  FHA Programs can offer credit scores as low as 580 middle score.
  • Low Rates = More House For The Money: What a borrower could afford 10 years ago with 6-7% interest rates gave the buyer much less buying power (less home afforability) than what can be purchased now.

Now that all of this is brought to the forefront, how do these factors influence a sale?

With low rates, motivated buyers, and a healthier workforce has lead to higher competition for housing.  Simple economics tell us when a good is in short supply and the demand outweighs the good, the price will go up.

Applying these ecomonics to housing is no different.  The majority of buyers want the shiny new renovation and the majority of sellers want top dollar for his or her home regardless of how it compares to recently sold homes in the area.

Look, many agents like to create stories of how they overcame obstacles for his or her client and look like a Real Estate God but let’s face it, that agent is just trying to look better, get you to work with them, or get a (like an overpriced) listing.  You’re not going to get it here, this is an actual example of how hiring the right agent (on either side of the transaction) can get you what you want or need.

Please give us an example!

In this particular instance, I am working for the sellers.  He and his wife purchase one or two homes a year to renovate and do so the right way…they take their time and pay attention to detail. They do not cut corners and finish the job quickly to get paid, they take the extra time and it pays off in the end.

These folks purchased a home from me in December, one that really had not been touched in 30+ years and it certainly showed; they had their work cut out for them.  After about 4 1/2 months I get a call from the seller asking me to come by to price out the home for sale, so I did.

I gave my professional opinion, we agreed, and listing contract was signed.  I knew that this home was going to generate a ton of interest due to the price, structure (it’s an all brick bungalow), location, and school district (St. Louis Area Schools are very much influential for pricing).

Yada, Yada the house went on the market, what next?

The home went on the market in early April and we had about 15 showings that day. I had numerous perspective buyers contact me off of Zillow, Trulia, and my phone and email were blowing up.

Then the agent phone calls started, is the home still available?” and “do you have any offers?”.  (As an aside, you need to know as a buyer a brand new renovation with all the bells and whistles including updated kitchen, stainless appliances, granite counter tops, hardwood floors, etc. is going to get competitive so you’d better be ready to put your best foot forward.)

That evening an offer lands into my inbox.  One that looked just about right, full list price, a LTV on the financing section on the contract, a solid dollar amount to put into escrow, and no seller concessions.  Great!

I call up the sellers tell them what I have; they’re excited.

Just as I am about to send it along another offer comes in, granted it wasn’t nearly as attractive, but it’s another offer.

This is where the I earn my stripes, where I get to sit at the Adult Table for Sunday Night Dinner and other agents get chicken fingers while sitting at a plastic Fischer Price Table.  I am nearly salivating at the chance to get this number up over the asking price.

When more than one contract comes in we are immediately in Multiple Offers.  What we are trying to do is get more money for the seller, having each buyer blindly bid against one another.

That’s exactly how it played out.  We got a pretty sizable chunk over asking price and went under contract.

Appraisal time

While under contract we went through all the same stuff, inspections, inspection notice, occupancy inspections, title, and then we waited to hear about the appraisal.

Typically agents order the appraisal right away to get the full underwriting going so that the buyer can obtain loan approval within his or her loan contingency period (usually 30 days after contract acceptance).

When you get loan commitment, the lender has done all of their diligence to lend to a buyer and allows for a clear to close.

So the appraisal was completed and the appraiser did his/her job by measuring rooms, taking extensive photographs, specifying finish levels, amenities, etc.

The appraiser then writes up the evaluation of the home by making adjustments based off of 3-5 sold homes that compare similarly to the subject home that is under contract to come up with a value.

Our value came in low, like five figures low which was disappointing but not the worst thing that could happen.  Again, this is where I am confident in myself and the product.

The agent working for the buyer sent an amendment to drop the sale price to the appraised value.  The Appraisal Rider states that the agent is required to inform the seller of the value within 2 days of receiving the appraisal.  Should they exercise this contingency the buyer is to provide a copy of the appraisal to the seller and the seller has 5 days to respond to the Buyers Agent in written format (an email is sufficient).

What did we do?  We stood pat on the price, holding our ground.

The agent working for the buyer was clearly frustrated as it certainly seemed he did not have control of his buyer and the emotions were flowing to the point where both the sellers and I could feel it.  I could also feel that they weren’t going anywhere knowing they’re never going to find a home in this price range with premium finishes.

My duty as an agent is to get the most money for the seller and that’s what I intended.  No one told the buyer to spend over asking price but we expected the buyer to honor the contract price.

This is exactly what happened.  The buyers forked over another $11,000 above the appraised value and my seller couldn’t have been happier.

So the Seller got more money, and…?

What makes this blog so powerful is that I worked for the seller at the highest level possible. Sure there are always going to be trials and headaches through any transaction, but this example shows the state of the market now and possibly in the near term.  With homes going into such competitive scenarios and the values lagging behind (somewhat), it is important as a seller to know that not every agent out there is willing to put his or her neck on the line for you.  We call this value and this seller values me and the service that The Agency provides.

-Brian Tash, Broker/Salesperson

(314) 651-9515