OfflineAn article this week at Cleveland.com tells the story of a couple who agreed to pay $218,000 for a home in the area, and were ready to close and move in. That’s until the appraisal came in at only $202,000. The seller would only knock off $4000, so the couple had to increase their down payment to fund the difference. They considered themselves fortunate to have had the extra cash to keep the deal moving.
Appraisers around the country are being criticized by just about everyone; real estate agents, builders, buyers and sellers. New rules and lender procedures are resulting in out-of-area appraisers coming in, and critics say that their lack of knowledge of the local market is causing botched appraisals. With so few buyers willing to buy in this market, and even fewer able to qualify for a mortgage, a low appraisal is the last nail in the coffin. Deals are dying when they’re badly needed to help improve the overall market.
One of the factors that contribute to these low appraisals, and isn’t understood by many buyers, sellers and even some real estate agents, is that these days appraisers must calculate and take into account the falling values of homes in the area. If an area is considered to be one where values are decreasing (most are now), then their value is reduced to take that into account. They can’t just rely on recent sold “comparables,” but must adjust based on overall market price action.
As the appraisers work for the lenders, and lenders are super-cautious these days, appraisers are being even more careful not to increase their liability for problems later from banks who might accuse them of over-estimating home values.
This is a great example of why you don't do a lease/option on upside down properties even if you get a little positive cash flow. You will loose out when it comes time for your tenant/buyer to exercise their option. They can only pay what the property appraises for. Now when properties start to appreciate, then this strategy can work. Maybe if you do a 10 year L/O on an upside down property!! Ha Ha Ha.
We always look for sellers that have equity when we do our lease options and we BUY right just like any other RE strategy!!
Michael Mangham
MD Home Acquisitions LLC
Knowledge is power, but execution trumps knowledge. Tony Robbins
http://www.mdhomeacquisitions.com Seller site
http://www.mdhomeacquisitionsbargainhouses.com Buyer site
http://www.mdhomeacquisitionshousehunter.com Bird Dog Site
http://www.mdlodeals.com Tenant/Buyer site
It's the same thing here in Dallas/Fort Worth. I was just talking with my realtor about this issue a couple of days ago. You can't pull sold comps and seperate the foreclosures from the updated "retail" homes anymore. The appraisers are taking EVERY property into account for home values. It sucks but, that just means we have to get the properties that much deeper of a discount. You just have to know where the bottom is in your market and what your buyers are willing to pay. Like Matt Larson says, having the RIGHT buyers helps. Take my market here in Dallas/Fort Worth. It is very unlikely to get a property on MLS at 30% off of asking but, you can get offers accepted at 20% off of asking and that's still a deal in this market, other markets need the deeper discounts. This is a fast moving market so, you don't have to get properties as cheap. All that to say, use the market decline in your favor and adjust your offers to reflect. Good luck to everyone!
Emidio "Billy" Ferritti
Equity on Demand Property Solutions, Inc.