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CAN APPRAISAL BE CHALLENGED?

Prices are up. This is making the appraiser’s job more difficult due to some rules put in place after the mortgage debacle of a decade ago. We are seeing some appraisal values come in less than the agreed-upon purchase price. If the contract has an appraisal contingency and the seller won’t come down and buyer won’t come up, this can be a deal-killer.

 

Appraising a property is not an exact science. There are “rules” to follow but appraisers also have some broad latitude in how the appraisal is done based on their judgement. Let’s say the subject property is a regular sale with no pool, and the last sold of that floor plan was a short sale with a pool. Whether or not that sold is used is up to that individual appraiser based on all the other factors.

 

Sometimes the price just gets bid up over what any reasonable appraiser can justify by following the standard appraisal rules. Let’s say there are 3 very recent solds nearby of the same floor plan, all with similar levels of upgrades and they all sold for around $550,000 but the subject property is in contract for $650,000. There isn’t much to be done in this case other than further negotiations between buyer and seller.

 

In other cases, there are obvious errors. Maybe the appraiser put down that the property has a 2-car garage when really it’s a 3-car garage. In this case, it’s fairly easy to provide proof of the error and ask that the report is recalculated with the correct facts.

 

And then there are cases where there may not be obvious errors, but just differences of opinion for what comparable properties were used, what adjustments were made between the properties, and whether adjustments were made for market trends. Next week I’ll discuss how to handle this third situation.

INTEREST RATE UPDATE

So my phone has been buzzing this week with clients nervous that with rates going up that it will make it harder for them to buy a home (if they are a potential buyer) or harder to sell a home (if they are a potential seller). The reality is that while the Federal Reserve did raise the overnight lending rate by .25%, mortgage rates haven’t changed that much from a month ago.

 

We need to keep in mind that the Federal Reserve doesn’t control mortgage rates. They can change what’s called the “overnight rate” at which big banks lend each other money to meet their reserve requirements. When this rate goes up, usually the other interest rates that consumers pay (credit card, car loan, etc.) go up. But mortgage rates don’t move in lock-step with this rate. Mortgage rates are for longer-term loans (usually 30 years) and few mortgages last the full term, anyways. They often get paid off in 7-10 years when people move. So mortgage rates are tied more to the rate on the 10-year Treasury Note, which moves based on what the economy is expected to do over the next 10 years. So that’s why you don’t always see mortgage rates go up with the Fed raises rates.

 

In this case, the rate increase was pretty much expected. So it’s possible that mortgage rates have been slowly increasing recently in expectation of this increase. That’s why when the increase is announced actual mortgage rates don’t change that much. It’s when there is a big change up or down that’s not expected that you may see mortgage rates change drastically. Similar to what happened when the stock market went UP the day that GM filed for bankruptcy. It was expected and already “priced in.”

WHO PAYS WHAT?

Last week I talked about how real estate practices differ from state to state. This week I’ll discuss who pays for what fees and costs in our area. And I’ll be talking about what normally happens. There can be situations that dictate a change (like a buyer paying their agent’s commission directly as part of a buyer’s broker agreement), or things can change based on negotiations between buyer and seller. So even though the below are local custom, what’s in the written contract takes precedence.

 

Here are the items that the seller normally pays for: Real estate commission, county transfer tax, natural hazard disclosure report, smoke and carbon monoxide detectors, water heater strapping, HOA disclosure package and transfer fee (if there is an HOA), gas pipe safety retrofit (if property is located in the County).

 

Here are the items the buyer normally pays for: Escrow fee, title insurance, lender fees, appraisal, inspections of the property.

 

There are some “grey-area” items: 1. Home warranty. Years ago I would have put this up in the items that a seller would normally pay for. However, I’ve seen more and more buyers not asking for this to make their offers more attractive in the event of multiple offers. 2. Pest inspection. This is another one that used to always be a seller cost but lately seems to be more common for the buyer to pay for it. Mostly it’s because the standard contract no longer contains that paragraph, and most buyer’s agents don’t add it back in, so it’s become a buyer cost.

 

Both buyer and seller will have other incidental fees at closing like notarizing signatures, courier fees, etc. Plus the property taxes and HOA dues (if applicable) will be pro-rated between buyer and seller as of the day of closing.

REAL ESTATE CUSTOMS ARE LOCAL

There is an old saying that, “All real estate is local.” This usually means that prices can be rising in one state while falling in another. We even see variances within states in this regard. But today I want to discuss the actual practice of real estate. The customs and un-written rules that agents are accustomed to.

 

One big difference between California and many other states is in regards to the purchase agreement and any counter-offers. If a seller wants to counter a buyer’s offer, in California we have the seller sign all the buyer’s initial offer, but then we attach a written counter-offer with any changes. My clients often pause when I present them the buyer’s offer to sign and they ask why are they signing what they aren’t agreeing to? Once I explain how the counter-offer trumps the original offer, they understand. In some other states, the accepted method to counter is to just cross out what the seller doesn’t agree to and then they hand-write in their changes and initial. Then if the buyer also initials those changes, they have a deal.

 

Another big difference is that in California the buyer and seller sign their closing documents at separate appointments, usually a few days BEFORE the official closing of the escrow. This means they often never met the buyer in person. This is different from many other states where both buyer and seller sit down at one big table together, sometimes on the day of closing itself. They often finish up the last of their packing, lock the house for the last time and then drive to the closing appointment in their rented moving truck. Once everything is signed they shake hands with the buyer and hand them the keys.

SO, HOW IS THE MARKET?

INVENTORY (SUPPLY): The number of resale homes for sale in East County is really, really low. I haven’t seen it this low since 2012-2013. That’s when the “mortgage meltdown” was pretty much over and prices started climbing again. The lack of resale homes is balanced out by the large number of new homes available again. So there are homes out there to buy, although the new homes are raising their prices to meet the demand.

 

BUYER ACTIVITY: (DEMAND): Very strong. Seems like a lot of buyers were late to the market this year due to all the rain. Our market was pretty slow in January and first part of February, but at the end of February we’ve seen a flood of buyers entering the market again looking for homes. Showings are up and attendance at open houses is up.

 

INTEREST RATES: Mortgage rates took a big jump a few months ago, but have levelled off since then. So we are no longer at historic lows, but it’s still possible to get a mortgage for somewhere around 4%, which is still a great rate.

 

PRICES: I’m seeing homes sell for more than they were last year. So while many “experts” were predicting that prices would flatten out this year due to higher interest rates and decreased affordability, so far they are wrong.

 

LOOKING FORWARD: Homes ARE still pretty unaffordable for the average person, and getting more so as prices rise. If rates increase more, or wages stagnate, or unemployment rises or inventory sharply rises suddenly as everyone tries to cash in on this market, we could see prices drop. On the other hand, if the economy gets stronger, and wages rise, and rates stay low, we could see even more price appreciation this year.

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