Ask the Expert: Failed Short Sale; Two Sides of Appraisals

Q. I know from your blogs that you work with home retention and short sales.  What are my if my pre-foreclosure home doesn’t short sell?

A.  Not all lenders will cooperate with a short sale, nor do they have to. Your options, at the point of pre-foreclosure, are to complete a loan modification, payoff the loan, reinstate the loan, transfer the deed to the lender through a deed in lieu of foreclosure or sell the property (either short sale or normal sale). Otherwise the lender will foreclose.

Most important in a evaluating your options in short sale and foreclosure is: What  are the specific time frames?

When was the Notice of Default (NOD) filed by the bank? When is the scheduled date for the trustee sale? Have you discussed a short sale with the lender’s Loss Mitigation Department? Was a complete short sale package submitted? Was a loan modification attempted?

Remember that as per HAMP (Home Affordable Modification Program) regulations, lenders must document all attempts at home retention, and certain time restrictions and written notices, specifying the borrower’s rights and responsibilities, must be adhered to.

A Deed in Lieu of Foreclosure is a another option, if the impact on the borrower’s credit is negligible and there aren’t any other liens or encumbrances against the property.

There are too many factors for me to list here, but suffice it to say that there are many obstacles to short sale, beyond just pricing and market conditions.  But under the right circumstances, it is reasonable to expect a short sale to be successful.

If you want to read more about this, I have prepared a FREE 32 page booklet on “How to Avoid Foreclosures” which details all of the processes for you. I will send it to you with absolutely no obligation, just to do my part in helping with home retention. Just contact me below.

Q. My house appraised for more than what I bought it for.  What does this mean?

There are two different occasions when the appraised value is potentially higher than the purchase price. One is at the time of purchase, the other is at the time of refinance.

If it’s a refinance, it simply means that an appraiser’s opinion of its market value today is higher than a different appraiser’s opinion of its value at the time of your purchase. The new lender will consider that you have built equity in your home, and will lend money on the refinance based on the higher value.  (More on market value below)

If you are purchasing a home a a retail purchase (seller to buyer), your lender simply wants to be sure that their investment (i.e. the loan money) is supported by other comparable homes. They use this method of approximating value to determine what dollar amount, based on percentage of value, that they will lend on the property.  Only on very rare occasions does the appraised value come in higher than the purchase price, because the appraiser knows the purchase price at the time he performs the appraisal, and therefore looks at the property with a somewhat tainted eye.

If you purchased a retail property and it appraised over value, it’s a rare bird. But appraisal is SUBJECTIVE; the real (market) value of a property is what a willing buyer will pay, and what a willing seller will accept. That is the definition of true market value. So in reality, for you, appraisal is irrelevant. And so it will be, to the next buyer. It is simply an approximation of value at a given time made by looking at various market conditions. It does not necessarily mean the property was undervalued by the seller.

It also does not mean you “got a great deal”. It means your appraiser looked at things differently than you and the seller did. And one post script: This is by no means instant equity.

The definition of equity is: the difference between the market value of a property and the claims (liens) held against it.

The important words: MARKET VALUE. As I said before, market value is what a willing buyer will pay, and what a willing seller will accept at a fixed point in time.

When you purchased your home, YOU defined its value, not the appraiser. Your sale is now a comparable that the next appraiser will rely on. That sale is a matter of record.

Q.  I finally found a home I really want to buy, and made a fair offer.  Now the appraisal has come in low.  What does this mean?

A.  In today’s market, yours is by far the more common situation.  As said above, if you are purchasing a home a a retail purchase (seller to buyer), your lender simply wants to be sure that their investment (i.e. the loan money) is supported by other comparable homes. Very commonly, the property will appraise under the purchase price, which will require you to get a second, and sometimes third appraisal, in order to obtain your loan. This is due, in large part, to new appraisal regulations.

The appraisal regulations have changed dramatically over the last year, and outside appraisers who are assigned jobs in areas with which they are unfamiliar are causing the appraisals to come in below market value on a much more frequent basis. Also, the lack of comparable retail sales and an abundance of distressed sales are making it harder and harder to appraise retail properties.

This is the time to take a deep breath, and IF you believe the property is worth what you offered, take the following steps:

1. Talk with your lender about ordering a reappraisal. Listen to their advice.

2. Have your Realtor prepare a good set of comparables to give to the new appraiser.

3. Have the Listing Agent meet the appraiser and do their due diligence by asking about the appraiser’s qualifications and LOCAL experience. If the appraiser is not familiar with your area and type of property, you have the right to ask for a different appraiser. DO IT!

If you believe you overpaid, then you can use the appraisal contingency to get out of the transaction; you can re-negotiate the purchase price with the seller (although the seller will usually want 2 appraisals before they will renegotiate), or you can make up the difference by adding to your down payment.

But rest assured, a low appraisal is VERY COMMON in this marketplace, based on new appraisal guidelines. It simply does not mean you necessarily overpaid. As I said in the question above, it means your appraiser looked at things differently than you and the seller did.

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