The Real Estate Appraisal came in below contract price. Now what?

When recently surveyed, over a third of real estate agents reported having had one or more home sale contracts fall out of escrow per month. Autopsies of these dead deals often surface a truly lethal culprit: appraisals that come in below the agreed-upon purchase price.

You see, mortgage lenders will only fund transactions up to a certain percentage of the appraised value of the home.  If the home appraises low, either the buyer must come up with an increased down payment amount, the parties must agree to a price reduction, some combination of both of these must happen, or the deal is off.

While low appraisals can be particularly potent deal killers, their danger to your deal can be neutralized in some cases. If you find yourself facing an appraisal lower than the sale price in the contract, add these five steps to your immediate action plan.

1. Appeal errors or bad comps to the appraiser.

 Read the entire appraisal report, cover to cover. See if you spot any errors – it’s not at all unheard of for an appraisal report to miss a bedroom or under report the home’s square footage. The trouble is that what starts out as a clerical error can often result in the application of the wrong “comparables” when it comes time for the appraiser to pick the properties to use as benchmarks of your home’s fair market value.
Whether or not you find actual errors in the details about the home you’re buying or selling, check in with your agent about whether the comparable properties used by the appraiser were reasonable, especially if they are from a different neighborhood, school district, town or construction era than the home you’re trying to buy or you are aware that much more similar or nearby homes have been sold in recent times than the comparable properties you see in the appraisal.

In my town, for example, within a half-mile radius you can find vast variations in property values based on neighborhood and schools and city limits that change almost imperceptibly. Changes in the mortgage industry over the last few years have created situations in which appraisers are sometimes assigned who have little or no familiarity with these hyperlocal types of nuances which you, as a party to the transaction, might be more readily able to detect and appreciate.
If you find errors or feel that there are much more comparable recent sales that justify a higher price for the property, work with your agent to send the correct information and the applicable comps you would propose to your mortgage professional, who can relay that information to the appraiser or Appraisal Management Company and request that the appraiser revise their report and estimate of value. The appraiser has no obligation to make the change, but the more glaring the error, the more likely it is that they will.

2. Ask for a second opinion.

 Particularly in cases of error or bad comps, if the appraiser ignores your request to revise the report, you might need to escalate your request to the lender itself. Here’s where it’s important to be working with an expert agent and mortgage pro with a great reputation; if they believe strongly in your case, they may be able to plead it to the underwriter and request that a second appraisal be done. The idea here is that if the second appraisal backs up your arguments, listing the correct property details or more accurate comparables, the lender is much more likely to exercise its discretion to deem the first one a dud and go with the second opinion.

3.  Renegotiate.

Low appraisals disappoint everyone around the negotiating table. If the sellers have the leeway (read: equity) or their bank agrees (in short sales), they might agree to bring the price down to the appraised value or near enough that the buyer feels comfortable putting some extra cash into the deal to close the purchase price-to-appraised price gap.  Some buyers refuse to ever do this on general principal, as they feel like it’s overpaying for the property.  Others realize that appraisals may come in low for reasons less indicative of the property’s value, like a dearth of comparable sales in the area, and figure that to get the home they want, they’re willing to kick in a little extra dough.
Of course, ‘little’ is relative, and neither position is right or wrong for everyone.
And the decision for sellers is just as personal. When the differential between the purchase price and the appraised value is small, it can seem like a no-brainer to bring the price down if mortgage considerations allow, but it can also seem sensible to request the buyer to make up such a small difference – especially in markets where properties are getting multiple offers.  On the other end of the spectrum, when the differential is big, it is less likely that the buyer will want to come up with the cash to close the gap, and also less likely another buyer will come along and offer the appraised price.
You would think these things would make a seller more willing to slash the price where the gap is big, but it also may make their moving plans less feasible, and tempt them to stay put and wait on the market to be more active and bear better comps.
Work with your agent to figure out what re-bargaining position really works for you.
If you do find yourself renegotiating price due to a low appraisal, remember that this is real estate, so everything is back on the table. For example, when the appraisal gap is only $1,000, a buyer might be willing to close the gap if the seller agrees to leave the lawn mower and do some small repairs.

4. Pay the difference or split the difference.

On the flip side of renegotiating is reconsidering your personal position. If you’ve been house hunting for two years, forgoing low rates and the tax and lifestyle advantages of owning your home, and you’ve finally found ‘the one’ – in great condition, not a short sale, perfect location – you might think long and hard about whether you are willing to pay the difference between a low appraisal and the purchase price. This is especially so when the gap is small and you have the cash, or when you know the seller is barely breaking even on the deal or has offered to split the difference with you, or the short sale bank refuses to go any lower.

And sellers, this goes for you, too: if you’re committed to trying to close the deal, it behooves you to consider whether you can reduce the price on the home. Consider that in some states and loan situations, a low appraisal report in a deal that dies may become a disclosure the seller must provide to future buyers (ask your agent whether this will apply to you). The fact is, if you don’t agree to a price reduction of some sort, the buyer could very well walk, limiting your options to selling at a lower price, doing a short sale or staying put anyway.

5. Change lenders.

Mortgage banks have more control when it comes to choosing appraisers than mortgage brokers do. (Fortunately, many experienced local mortgage brokers work for companies that also have banking divisions, and may be able to process your loan through that division in an effort to get your transaction a fresh start and work around a low appraisal.  Ask your mortgage broker if their office has a banking division, if you’re not sure.)

Mortgage brokers are no longer able to hand-pick appraisers for a given transaction like they once could, but unlike broker-only firms (who are forced to work through a middleman company that may pay a cut rate, attracting less experienced appraisers), mortgage banks and hybrid broker-bankers are allowed to pick the set of people included on their own short list of appraisers. I’ve found that lenders use this short list for good much more often than to try to exert any sort of inappropriate influence.
My experience has been that, when compared with the appraisers national lenders and the middleman companies put to work on brokered transactions, small mortgage banks and local, hybrid broker-bankers tend to fill their lists with appraisers who have more local experience and can appreciate the uber-important local nuances like those described in #1, above. 

Source:Trulia.com

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HARP 2.0 - The New Mortgage Plan

There has been a lot of hoopla regarding President Obama’s announcement of a revised mortgage program (Home Affordable Refinance Program – HARP) to assist underwater homeowner’s in refinancing.   There is a lot of misinformation about the program and what it aims to accomplish so I figured I would provide a few facts and insights about what HARP 2.0 is actually trying to accomplish and how it will or won’t work.

First, this is an EXISTING program that has been in place for the better part of two years.  Second, the program has nothing to do with helping homeowner’s who cannot afford their current home.  HARP was intended to assist homeowners who still qualify income and credit wise under normal and current mortgage guidelines.  However, because the value of their home may have declined precipitously they are unable to refinance due to loan to value restrictions.  For example, you bought a home with 20% down five years ago at a rate of 6%.   Current rates are at 4% or you wanted to refinance into a 15 year fixed at 3.25% to shorten the amortization term.  Unfortunately, current appraisals show the values in your neighborhood have declined enough to wipe out your equity and despite your initial large down payment, you now have a loan that has a 100% or more loan to value.    You are now unable to refinance.   HARP was put in place so these QUALIFIED homeowners can take advantage of lower interest rates.

Like most government programs, the original HARP program was not very effective only assisting around 800k homeowners.   The main reason the program didn’t work as well as intended was because all the interested parties didn’t come out to play as many of us in the industry predicted.    There were issues with second mortgages not agreeing to re subordinate behind a new mortgage.   Private Mortgage Insurers (PMI) were not agreeing to transfer the PMI policies to new mortgages.   Fannie Mae/Freddie Mac had loan level price adjustments that eroded the benefits by making it too expensive to refinance.  Finally, because banks were not absolved of the liability of refinancing higher LTVs, many lenders just refused to do the higher loan to value deals capping them at 105% loan to value  in most cases.

The new HARP 2.0 program is designed to remove some of the barriers that limited the program’s success the first time.  For example, LTV restrictions are being removed entirely and the “reps and warrrants” are being adjusted so lenders are not being held liable for following the rules of the program as designed.   Loan level price adjustments will also be removed so that the borrowers are actually able to get current market interest rates.  Further, the new program is actually going to encourage homeowners to take on shorter amortization loans this time instead of just refinancing to a 30 year fixed.   By putting these homeowners in shorter term loans, they will build equity much faster and pay much less over the life of the loan.  I believe what is actually going to happen is we will see a refinancing wave of borrowers going into 15 or 20 year mortgages instead of 30 year fixed rate loans.
At this point, the specific details of the program have not been released yet and are due out November 15th.  Then banks will have to make preparations for new refinancing deals so the program may not actually be available until December or even January.  Finally, your loan must be owned by Fannie Mae or Freddie Mac and originated prior to June of 2009.

My prediction is that this program will help many of the homeowners who fell through the cracks the first time around.  However, it still will not solve the housing problems we face because it is limited to Fannie Mae and Freddie Mac loans.  There are still several million home owners who are underwater who do not have loans currently serviced by Fannie Mae/Freddie Mac.   Until those loans are addressed, the housing market will continue to falter.

12 Easy Repair Jobs to Pamper Your Home

 

Stuck inside during these winter days? Take advantage of your indoor time by giving your home a few quick repairs.

Accomplishments — even little ones — go a long way toward a sunny outlook. Fortunately, there are plenty of easy, quick home repair chores you can do when you’re mired in the thick of winter. For max efficiency, make a to-do list ahead of time and shop for all the tools and supplies in one trip. On your work days, put the basics in a caddy and carry it from room to room, checking off completed tasks as you speed through them.

What to look (and listen) for

In each room, look around and take stock of what needs fixing or improving. Focus on small, quick-hit changes, not major redos. Here are some likely suspects:

1. Sagging towel rack or wobbly toilet tissue holder. Unscrew the fixture and look for the culprit. It’s probably a wimpy, push-in type plastic drywall anchor. Pull that out (or just poke it through the wall) and replace it with something more substantial. Toggle bolts are strongest, and threaded types such as E-Z Ancor are easy to install.

2. Squeaky door hinges. Eliminate squeaks by squirting a puff of powdered graphite ($2.50 for a 3-gram tube) alongside the pin where the hinge turns. If the door sticks, plane off a bit of the wood, then touch up the paint so the surgery isn’t noticeable.

3. Creaky floor boards. They’ll shush if you fasten them down better. Anti-squeak repair kits, such as Squeeeeek No More ($23), feature specially designed screws that are easy to conceal. A low-cost alternative: Dust a little talcum powder into the seam where floorboards meet — the talcum acts as a lubricant to quiet boards that rub against each other.

4. Rusty shutoff valves. Check under sinks and behind toilets for the shutoff valves on your water supply lines. These little-used valves may slowly rust in place over time, and might not work when you need them most. Keep them operating by putting a little machine oil or WD-40 on the handle shafts. Twist the handles back and forth to work the oil into the threads. If they won’t budge, give the oil a couple of hours to penetrate, and try again.

5. Blistered paint on shower ceilings. This area gets a lot of heat and moisture that stresses paint finishes. Scrape off old paint and recoat, using a high-quality exterior-grade paint. Also, be sure everyone uses the bathroom vent when showering to help get rid of excess moisture.

6. Loose handles or hinges on furniture, cabinets, and doors. You can probably fix these with a few quick turns of a screwdriver. But if a screw just spins in place, try making the hole fit the screw better by stuffing in a toothpick coated with glue, or switching to a larger screw.

Safety items

You know those routine safety checks you keep meaning to do but never have the time? Now’s the time.

7. Carbon monoxide and smoke detectors. If you don’t like waking up to the annoying chirp of smoke detector batteries as they wear down, do what many fire departments recommend and simply replace all of them at the same time once a year.

8. Ground-fault circuit interrupter (GFCI) outlets. You’re supposed to test them once a month, but who does? Now’s a great time. You’ll find them around potentially wet areas — building codes specify GFCI outlets in bathrooms, kitchens, and for outdoor receptacles. Make sure the device trips and resets correctly. If you find a faulty outlet, replace it or get an electrician to do it for $75 to $100.

Another good project is to replace your GFCIs with the latest generation of protected outlets that test themselves, such as Levitron’s SmartlockPro Self-Test GFCI ($28). You won’t have to manually test ever again!

9.  Exhaust filter for the kitchen stove. By washing it to remove grease, you’ll increase the efficiency of your exhaust vent; plus, if a kitchen stovetop fire breaks out, this will help keep the flames from spreading.

10. Clothes dryer vent. Pull the dryer out from the wall, disconnect the vent pipe, and vacuum lint out of the pipe and the place where it connects to the machine. Also, wipe lint off your exterior dryer vent so the flap opens and closes easily. (You’ll need to go outside for that, but it’s quick.) Remember that vents clogged with old dryer lint are a leading cause of house fires.

11. Drain hoses. Inspect your clothes washer, the dishwashers, and the icemaker. If you see any cracks or drips, replace the hose so you don’t come home to a flood one day.

12. Electrical cords. Replace any that are brittle, cracked, or have damaged plugs. If you’re using extension cords, see if you can eliminate them — for example, by replacing that too-short lamp cord with one that’s longer. If you don’t feel up to rewiring the lamp yourself, drop it off at a repair shop as you head out to shop for your repair materials. It might not be ready by the end of the day. But, hey, one half-done repair that you can’t check off is no big deal, right?

source: houselogic.com

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