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Appraisals killing deals in many markets

October 6th, 2009 1:01 PM

Appraisals killing deals in many markets

Finding the right house to buy is never easy; selling a home today is also challenge. It's best to prepare yourself for obstacles that could cross your path so that you're prepared should they arise.

In some markets, one in three transactions doesn't close. This is a high ratio compared to the fallout ratio in previous years when the housing market was stronger and financing options were plentiful. In past years, most transactions fell apart over inspection issues. The biggest hitch today is financing, which is not to say that property defects don't come into play.

For some time, lenders have tightened up on their qualifying criteria, making it more difficult for buyers to obtain the financing they need to close a sale. Recently, appraisals have become problematic, particularly in low-inventory, higher-priced neighborhoods.

There are three components to lender approval. The borrower must be financially qualified. This requires a good credit score, sufficient cash for a down payment and closing costs, as well as verifiable income. The lender also needs to approve a title report on the property to confirm that the seller has marketable title to the property. And, the lender needs an appraisal of the property to confirm that the buyer is not overpaying.

Previously, lenders' underwriters required three comparable sales in the area that occurred within the last six months to validate the purchase price. Due to the soft housing market, lenders now want to see comparable sales information on listings that sold and closed within the last three months. The listing inventory in some areas was very low from December 2008 through March 2009, making it difficult for appraisers to come up with enough comparable sales information to satisfy the lenders.

To complicate matters, some appraisers and lenders automatically lower the appraised value by a certain amount if the property is in an area that is deemed as a declining market. This can result in an appraised value that is lower than the price the buyer and seller agreed to in the purchase contract.

HOUSE HUNTING TIP: The most accurate appraisals are done by appraisers who know the local market well. Unfortunately, changes in the lender's practices are resulting in more appraisals done by appraisers from outside the local area. Many lenders no longer have their own, in-house appraisers; many are relying on large nationwide appraisal services to provide appraisal services.

Let's say a listing sold for $1 million, but appraised for only $950,000. One way to resolve the problem is for the buyers and sellers to split the difference. In this case, the sellers lower their price by $25,000 and the buyers put an additional $25,000 cash down.

For the cash-strapped, this is not an option. In this case, the sellers would have to lower the price by $50,000 to keep the deal together. Some sellers might be willing to carry a second mortgage as long as it doesn't exceed the lender's loan-to-value (LTV) limit and the loan isn't due for at least five years.

THE CLOSING: Check with your lender before attempting to negotiate a seller carry-back; some lenders won't allow it.

Dian Hymer is a nationally syndicated real estate columnist and author.

Posted by Amit Inamdar on October 6th, 2009 1:01 PMPost a Comment (0)

Sellers: Think twice about high offers

October 27th, 2009 10:15 AM

Sellers: Think twice about high offers

Sellers who are lucky and receive more than one offer should carefully consider all aspects of the offers before accepting the one with the highest price. Even if you receive only one offer and it's lower than your asking price, you might want to consider bending some on your price in exchange for a transaction that is likely to close.

Ideally, you want a committed buyer who has a good credit score and financial resources, and who has been preapproved for a mortgage, as lenders have tightened their qualifying criteria considerably.

HOUSE HUNTING TIP: Your real estate agent should ask the buyer's agent for permission to contact the buyer's mortgage person directly to find out if there is any reason the buyer wouldn't receive credit approval. An offer from a gold-plated buyer at a lower price may be a better deal than a higher-priced offer from a marginally qualified or low-cash-down buyer.

Another issue to consider if you receive more than one offer is the likelihood of the property appraising for the higher price. Appraisals have become a problem recently, particularly in declining markets. Appraisers make downward adjustments for properties that are deemed to be in declining markets.

Are there at least three comparable sales that closed within the last three months that can be used to justify the buyer's offer price? If not, the appraiser might have difficulty appraising your property for the purchase price.

Buyers usually include an appraisal contingency in their offer. If so, the buyer usually has the option to withdraw from the contract if the property appraises for less than the contract price. Some buyers won't buy a home that appraises for less than they've agreed to pay.

A buyer who is committed to making the deal work is more likely to be able to accept an appraisal that is lower than the purchase price. In this case, the buyers and sellers negotiate a mutually acceptable resolution. For example, the sellers could agree to accept a lower price if the buyers agree to increase their cash down payment.

Many buyers don't have additional cash. In this case, if the seller wants to keep the deal together and the buyers won't or can't complete the purchase at a price higher than the appraised value, the contract price will need to be reduced or the deal will fall apart.

There are a lot of uncontrollable elements in a home-sale transaction. One is that you have no control over who represents the buyer. That is, unless you receive more than one offer. In some cases, it may be worthwhile to accept a lower-priced offer from a buyer who is represented by an agent with a good track record in your area -- one who is experienced, trustworthy and diligent.

A clean offer is one that is not loaded up with contingencies. Typical contingencies are for inspections, and loan and appraisal approval. An offer that's contingent upon the sale of another property is riskier than one that's not. A noncontingent offer, even at a lower price, might be the best offer because it has more certainty of closing.

An offer that is contingent upon the close of another escrow may be worth the risk, particularly if all contingencies have been removed from the buyer's contract. Request confirmation from the buyers that contract contingencies have been removed and find out from the closing agent or escrow officer when the closing is likely to occur.

THE CLOSING: The uncertainties in the current market make it important to carefully consider the terms of an offer, not just the price, before you accept it.

Dian Hymer is a nationally syndicated real estate columnist and author.

Posted by Amit Inamdar on October 27th, 2009 10:15 AMPost a Comment (0)

Is 80-10-10 financing dead? Can PMI be avoided?

October 13th, 2009 10:57 AM

Is 80-10-10 financing dead?

Can PMI be avoided?

One of the few certainties in the real estate business is that it's always changing. At this point, the financing end of the business changes daily. A lender may approve a loan one day and decide just before closing that it no longer offers that type of financing. Then, weeks later, they are back in the game.

It's widely known that the easy-qualifier loans that got so many homeowners into trouble recently are no longer available. Most conventional lenders want the borrower to put cash into the deal, have very good credit scores, and be able to verify employment. Mortgage lenders are in a very cautious mode.

The 80-10-10 financing, a popular financing vehicle for qualified, low-cash-down buyers, has virtually disappeared. With 80-10-10 financing, the buyer makes a 10 percent cash down payment. A conventional lender gives the buyer a mortgage for 80 percent of the purchase price, and the borrower takes out a second mortgage against the property for the remaining 10 percent.

When buyers put less than 20 percent down on a home purchase, the mortgage lender usually charges private mortgage insurance, or PMI. This insurance protects the lender in the event that the buyer defaults on the loan. PMI adds to the cost of the monthly mortgage payment.

In time, if the buyer can substantiate that there is 20 percent equity in the property, the PMI can be eliminated. But, it doesn't happen automatically. It requires a verification process.

HOUSE HUNTING TIP: Buyers who can't get financing without PMI should be prepared to pay PMI for the foreseeable future. Home prices may not have bottomed out yet. No one knows when we'll enter the next cycle of home-price appreciation. The future appreciation rate is uncertain. However, you can build equity, without depending on appreciation, if you pay down the amount owed until the mortgage equals 80 percent or less of the property value.

It's precisely because of the declining market that lenders are gun-shy about 80-10-10 financing. There are few, if any, lenders who do 10 percent second mortgages for home purchases. If the value of the property were to drop 10 percent, the property would be 100 percent financed. Should values drop further, and the borrower stopped making payments, the lender could lose out completely if the property couldn't sell for enough to repay the second mortgage.

Recently, however, buyers were able to purchase their first home in Montclair, a popular neighborhood in the hills of Oakland, Calif., using 80-10-10 financing. They were very well qualified financially, but they wisely decided to preserve some of their cash for home maintenance and improvements.

Their mortgage broker arranged a 90 percent mortgage for them -- one that required PMI. The buyers shopped around and were able to find an 80 percent first mortgage with a lower interest rate. They got a private second mortgage for 10 percent of the purchase price, so they didn't have to pay PMI. This alone saved them $150 per month. The first mortgage lender approved this financing arrangement.

Most lenders, at this point in time, won't permit buyers to obtain secondary financing. But, there are lenders that will allow this sort of financing. If you don't have access to a private-money second, see if the seller might be willing to carry back 10 percent. If you have 15 percent to put down, perhaps the seller would agree to a second mortgage for 5 percent of the purchase price. And, don't be bashful about asking your parents for an early inheritance.

THE CLOSING: Many parents are pitching in so that their children and grandchildren can settle in a good long-term home in a desirable location.

Dian Hymer is a nationally syndicated real estate columnist and author.

Posted by Amit Inamdar on October 13th, 2009 10:57 AMPost a Comment (0)