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You Can’t Trust All Sacramento Appraisals
It’s not astonishing that people do not understand how a Sacramento appraiser appraises a home, and why not all appraisals are a guarantee of value. Unless you’re a person who is really wedded to this business, like, say, this Sacramento real estate agent. But most individuals don’t sell or buy enough homes in their lifetime to care much about the details. They also might think a bank appraisal is like receiving a certificate of gold, as though it’s redeemable somehow or an item of value to treasure.
I see the look in the eyes of my sellers when I explain that a home needs to appraise at the price a buyer is willing to pay in order to actually close escrow. The eyes glaze a bit and they hear: real estate agent talking — a phrase my husband likes to use to illustrate how carefully I listen to him as in husband talking, yada yada.
For example, if you’ve got two offers for a home, and one offer is cash at $400,000, and another offer involves minimum-down FHA financing at $400,000, a seller might elect to take the cash offer. Because there is no appraisal. Of course, the downside to that is the cash offer buyers typically possess little emotional investment, and once they snag their fish, they often try to haggle over other small things to even out stuff.
Now, some buyers might agree to bridge the difference if an appraisal comes in low. They might say they will pay, say, $10,000 in cash, meaning if the appraisal was $390,000, they would pay out of pocket the difference for the low appraisal. Some do, but not very many. That’s because people still believe the appraiser’s word is like the 10 Commandments. Others also might promise they’ll bridge the difference but then cancel under an inspection contingency, rendering that promise worthless.
An appraisal is just an opinion of value. It’s an educated and calculated guess. Ask 3 appraisers, and you’ll probably get 3 different answers. They might be close in value, but still not match.
Sometimes, the swing in value between two appraisals is tremendous. Had one of those recently in which the home initially appraised for 10% more than it sold for, which was pretty ridiculous in a seller’s market for long days on market, and the second appraisal was 2% less than it sold for, still ridiculous. An appraiser almost has to be trying to mess up the deal to do that.
I recall an appraiser a few years ago who appraised a home for .0001 less than the sales price. Just enough to make the buyer pay for a new appraisal. Who does things like that? Most appraisers in today’s market want to appraise at the sales price because they recognize that prices are increasing. They don’t want to be that cog in the wheel dragging down the market, and they want to fairly assess homes.
But until you get past that appraisal stage, you don’t really have a sale. So don’t be spending that check yet. It’s common in today’s real estate market, especially for an FHA transaction, for a lender to order a second appraisal. It says if a bank doesn’t trust its appraisal, why should you?
The Three Prices for a Home in Sacramento
I hear all sorts of phrases from sellers when it comes time to price a home. I think they all went to the same school of ways to sell your home in Sacramento. Often, they want to price it too high, and they justify this by saying, “I don’t want to give it away.” Come on. Have you ever seen anybody give away their home? Hey, I found this sitting out back by the dumpster; will you take this deed off my hands? OK, maybe if it’s a short sale. Or, they will say, “Let’s test the market.” OK, but what if you fail the test? You only get one chance at being a brand new spankin’ listing. It’s like Goldilocks, you don’t want to be priced too high or too low. You want to be priced just right.
Pricing a home to sell is an art. It’s also a science. I listen to sellers because, believe it or not, I don’t always know everything. I realize that’s a difficult concept to wrap your head around, a Sacramento real estate agent who might admit she still has stuff to learn and is not the master puppeteer of the Sacramento world of real estate. Because stuff constantly changes. But I believe I have a pretty good handle on figuring out the best price for a home in Sacramento. Moreover, at the moment, I am selling homes at astronomical prices. That’s because it’s a seller’s market in Sacramento. A wild and crazy seller’s market. This nutty market doesn’t mean one can throw logic and reason out the window, though.
There are always 3 prices for a home:
- The price the seller would like to receive.
- The price the buyer wants to pay.
- The price the buyer’s appraises it at — and who ultimately has the last word.
If you get an appraiser from some other town — which isn’t hard to do these days — the appraisal can be too low. Sometimes, it’s because the comparable homes used by the appraiser to justify value sit in a different neighborhood, even though they are within a half mile of the subject property, and those homes in an adjoining neighborhood could be worth much less. An appraiser who is unfamiliar with the neighborhood wouldn’t know that fact.
The way pricing works is unless you receive a cash offer, your home will be assessed by the buyer’s appraiser. If there are no comparable sales for your home, the appraiser will use the sales that are available. This is why you need to examine the comparable sales — particularly the pending sales that will become your comparable sales — before you put your home on the market. If there are no comparable sales to justify your desired sales price, perhaps this is not the time to put your home up for sale. Perhaps you should wait and watch.
Of course, you will then miss the best real estate market in Sacramento since 2005. I don’t think you want to do that.
A Twist in the Sacramento Real Estate Market
I’ve noticed a slight difference in the Sacramento real estate market this week. It’s a sign, I believe, that the market is struggling to head north instead of south. I wouldn’t say we are headed for full-blown appreciation by any stretch of the imagination but it is a positive signal that we might be pulling out of this real estate slump in Sacramento. It’s the piece of evidence I’ve been watching to emerge and have not yet witnessed until this week. We’ve monitored small median price change increases in year-over-year monthly stats, but not this.
I prepare offer tracking sheets for each of my listings. That way, if I need to know years from now about the offers I had received for any particular real estate listing, I’ve got that information at my fingertips. Each of these sheets give me an overview of what happened. For the first time since 2005, I’m receiving over-market offers from investors who are paying cash. That’s the sign I’ve been waiting for. I disregard the first-time home buyers. It’s the investors I watch.
For months now, multiple offers in Sacramento have been the norm. That’s due to low inventory, low interest rates and high demand. It’s cheaper to buy in the buy or rent scenario. When it’s cheaper to buy than to rent, it also means investors will get positive cash flow even if they finance a home. So, investors and first-time home buyers have been competing, often for the same home.
Here is something to understand about first-time home buyers. When a first-time home buyer bids over list price for a home, that home buyer is not taking extra money out of her pocket. She is rolling the excess into her mortgage. So, it’s not really costing her a lot of extra money to make a purchase offer over the seller’s asking price. If she offers an extra $5,000, her mortgage payment changes by about $30. That’s peanuts. Using that formula, at 3.5% interest, she can bid $15,000 over list price and still not change her mortgage payment by more than a hundred bucks. Of course, it might not appraise at that amount, and therein lies the major problem with first-time home buyers overbidding.
If there are no comparable sales available at that price, the appraiser won’t submit a value at the purchase contract price. If the buyer gets a low appraisal, her only solution to move forward is to pay the $15,000 difference out of pocket, in cash. Most don’t have that kind of cash and, if they did, they wouldn’t pay over market with it. Not just for the opportunity to buy a home, nope. Unless they would. Unless they were that desperate to buy a home.
Not only am I seeing owner occupants who are willing to play all loosey-goosey with cash, but now investors are, too. Investors are no longer guarding their cash like a precious commodity. They are willing to pay above market value, because that’s the last thing to give in negotiations. It’s no longer enough to pay cash. Now, it’s got to be over market. That’s what it takes to make prices go up. An investor who is willing to pay more than the going rate. Investors who pay over market result in higher comparable sales. Higher comparable sales pave the road for higher appraisals, which opens the flood gates for first-time home buyers.
The kink in all of this is sellers don’t seem to be aware of this new twist. When I tell sellers about the market, they look at me like I just landed here from Mars. Do I have spinach in my teeth?
I predict a very strong 4th quarter for 2012. I believe when we look back at the numbers in the spring, our Sacramento real estate market will blow your socks off. This is a fabulous time to be a seller or a listing agent in Sacramento.
Yet Another Low Appraisal on a Sacramento Short Sale
Elizabeth, how do you do it? That’s what a seller asked me yesterday. She was very ecstatic that her short sale closed but it wasn’t an easy road. She thanked me for making the process less painful than it could have been. For many Sacramento short sale sellers, I am their rock. I’m not just a Sacramento short sale agent. I am the individual these people rely on to help them through the emotional upheaval. Don’t let anybody kid you, surviving a short sale can be like crawling naked through shattered glass.
Here’s a better example. Short sales are like driving down the road, la-dee-da, and all of a sudden, whammo. You’ve got a deer’s antlers blasting through your windshield, stuck in your steering wheel, inches away from your face. There were no deer-crossing signs on the road. It wasn’t dusk or dark outside. Nothing could have prepared you for that deer who suddenly leaped across the highway. People think that all short sales are the same and they aren’t. Even though I’ve closed hundreds of short sales, I still can’t always predict with pinpoint accuracy what will happen.
Take low appraisals for example. Generally, when the buyer’s appraisal comes in low, the short sale bank will issue a revised approval letter at the appraisal’s price point. Especially when it’s an FHA appraisal. FHA appraisals are assigned a case number. So, if the bank rejects the lower appraisal and the home goes back on the market, the next FHA buyer will get the same appraisal. I hear conventional appraisals are positioned to be assigned case numbers as well.
That didn’t happen in this particular client’s short sale. Her lender was Citimortgage, now One Main Financial. Her buyer obtained 2 appraisals. The first appraisal was conventional and was, oh, say, $200,000. Good thing because that was the sales price and also the amount approved in the short sale approval letter. But wait. Somebody at U. S. Bank ordered the wrong appraisal. It was supposed to be an FHA appraisal. The buyer then paid for an FHA appraisal. That appraisal was, oh, say, $180,000. We were suddenly $20,000 apart.
We signed an addendum lowering the price and sent the FHA appraisal to Citimortgage. Much to our astonishment, Citi said your mother is a hamster and your father smells like elderberries. We argued. Citi refused to accept the appraisal. I sent my own opinion of value and CMA. Finally, I was able to move Citi up to oh, say, $195,000, but we were still apart $5,000. Now, in some other universe, this transaction would have probably blown up at that point. However, the buyer really really wanted this home. So, she borrowed $5,000 from her parents to pay the difference.
This is why selecting the right buyer is key to the successful outcome of a short sale. But the suspense wasn’t over yet. Remember, this poor unfortunate buyer had chosen U. S. Bank as her lender. The bank’s representatives performed poorly, to say the least. U. S. Bank managed to mess up the closing six ways from Sunday, especially funding. It was so bad at closing that the escrow company had to bitchslap them. A quiet, mind-your-own-business escrow assistant really laid into them. But we finally prevailed and escrow closed. Another happy ending in Sacramento!
The way that I do my job as Lyon Real Estate’s #1 short sale agent is I keep my eyes on the horizon, my hands on the wheel. And I hope to god I don’t meet some deer hopping across the road.
Photo: Elizabeth Weintraub
