Ready to navigate the labyrinth of real estate appraisals? We guarantee, by the end of this episode, you'll understand what goes into an appraisal and how to approach it if it comes in lower than expected. We kick things off discussing the nuances of real estate appraisals, emphasizing its necessity when buying property with a loan. We unravel how it involves a comparative analysis of at least three recently sold properties in the area. We also examine the influence of past trends on the real estate market, specifically how low-interest rates drove people to pay more than the appraised value.
We then switch gears to discuss the complexities involved when appraisals don't quite meet expectations and how to negotiate these tricky circumstances. Hear from us about the value of collaborating with local appraisers and lenders, who have a deep understanding of the market. We share instances where a seemingly disadvantageous low appraisal can actually be beneficial for the buyer. Wrapping up, we impart essential tips on how to protect your money in real estate and handle situations when appraisals return lower than anticipated. Whether you're an experienced property investor or dipping your toes in for the first time, this episode offers a treasure trove of insights to guide you in your real estate journey. Let's get started!
Ready to navigate the labyrinth of real estate appraisals? We guarantee, by the end of this episode, you'll understand what goes into an appraisal and how to approach it if it comes in lower than expected. We kick things off discussing the nuances of real estate appraisals, emphasizing its necessity when buying property with a loan. We unravel how it involves a comparative analysis of at least three recently sold properties in the area. We also examine the influence of past trends on the real estate market, specifically how low-interest rates drove people to pay more than the appraised value.
We then switch gears to discuss the complexities involved when appraisals don't quite meet expectations and how to negotiate these tricky circumstances. Hear from us about the value of collaborating with local appraisers and lenders, who have a deep understanding of the market. We share instances where a seemingly disadvantageous low appraisal can actually be beneficial for the buyer. Wrapping up, we impart essential tips on how to protect your money in real estate and handle situations when appraisals return lower than anticipated. Whether you're an experienced property investor or dipping your toes in for the first time, this episode offers a treasure trove of insights to guide you in your real estate journey. Let's get started!
Hi, this is Rebecca Giacobo and Stephanie Co with. I Love Palm Beach, and this is a real estate edition. Hence it's just her and I today, and we are going to talk about appraisals. We're going to figure out what an appraisal is, who's getting one, what it means and how things have changed in the last few years and the stories to go with it all, absolutely.
Speaker 2:Alright. So, first off, what is an appraisal? So appraisals are mandatory when you're buying a property through a loan because at the end of the day, the loan is not going to go against unrealized lateral. We need to see what the property is worth before we can give out the loan on it. Now a lot of people get appraisals mixed up with inspections. Inspections are when you have, you know, your qualified individual, go out there and check all the light switches, the plumbing, that kind of thing. The appraisal is where they take different properties that have sold in the area in a recent amount of time and then go through and they evaluate and say okay, you know, this one's very similar to yours, but this one has a pool and yours does not, so we're going to adjust $25,000 or whatever the proper market adjustment is for that difference. And then they go through all the different formulas based off of the other recent sales and it's always at least three recent other sales and come up with a value that they think that your property that you're purchasing is worth.
Speaker 2:Now you're buying a property cash. You don't have to get an appraisal on it, but you can if you want to. But because there's no bank involved in, you know, regulating the process. Some people do, some people don't. And then, outside of all that too, there are the one offs, where the bank sees that your file is very beautiful and clean, you've got great credit, you're putting a great amount of money down and they, you know, they've done their background on the property. So maybe you don't need an appraisal and you get what's called an appraisal waiver. But that's the outlier. Most purchases do have to have an appraisal, and it's not the bank that gets to decide whether you get an appraisal or not. It's Fannie Mae, freddie Mac. They're the ones that issue that appraisal waiver once we put everything in. So that's not going to change by which lender you go to.
Speaker 1:Anyways, all that being, said what that being said is. The lender doesn't even really get to choose the appraiser.
Speaker 1:They have called like a. It's like a pool of appraisers that are qualified and certified and they pick randomly there. So the loan officer cannot talk to the appraiser. The realtor is not supposed to talk to the appraiser, though I often get the opportunity because I have to meet them to let them in the house and I can kind of maybe suggest some comps, I can remind them of things that have been done to the house and kind of make sure that they're seeing everything that's going to give the best value to the property.
Speaker 1:An appraisal is just an opinion of value. That appraiser. This is their opinion of value based on closed sales in the MLS. So I'll have people say to me well, my neighbor's house sold for 500,000. But the only comparables that I have in the MLS are all in the 450s. That sale cannot be used, even if it's showing in the tax record. This is what's recorded commonly in the MLS and can be verified. Sometimes appraisers come from other areas and they also don't know about that. This particular neighborhood is rising or the neighborhood next door may be declining and it could be for reasons like a poorly managed HOA. The community is not being taken care of, there's a pending lawsuit in the association and sometimes an appraiser who comes from out of area isn't going to know those things. So you really want your realtor to try to get involved and make sure that appraiser knows everything that's going on.
Speaker 2:Because, at the end of the day, different appraisers can give different values and different opinion of values to the same property, even with the same market conditions, right? Like you're saying, if an appraiser is not from the area, they might not realize that this neighborhood is more sought after than the neighborhood two miles over, and so they might not adjust for that extra value or that extra perceived value in the area. So, like you were saying too, the reason we can't pick our appraisers is because we as lenders, we don't want to get in trouble for collusion there's all these rules in the whole mortgage side of it all or we can't influence the value. Now we can argue the value if they give in their report back and you see this a lot with VA appraisals, especially if there's something called tide water I don't know why. I can't think of it right now.
Speaker 1:Yeah, I know what you're saying.
Speaker 2:Anyways, you guys are having to excuse me, they have a name for it. Anyways, they send the appraisal back to us and the appraiser sometimes will ask us hey, this appraisal is coming in low. Do you have other sales to support the value? So this happens more often than you would think. It just depends on where the market is. So before in the past let's say mid 2020, 2021, and most of 2022, the market was going crazy and I don't have to explain that to all of you guys.
Speaker 2:You guys saw it all across the country to where everyone wanted to purchase real estate because rates were super low and they could buy it for a great payment on it all. So, anyways, with all of the offers going in on properties, the amount of sales that were happening, the value wasn't there to support the demand. People were willing to pay more for the property just to get in the door. So I'm sure you saw Rebecca on your side with the listings that you would get 20, 30 offers. And then the common phrase added was is willing to pay above the appraised value, Right? So most offers, they would say, OK, we're willing to pay an extra 30,000 or whatever amount of money over the appraised value on it and the loan was fine with that. You guys just have to handle it cash on top of the regular loan transaction, and that was more often than not.
Speaker 1:So what was happening is a lot of the first-time buyers who were using a VA or an FHA mortgage, who typically had a lower down payment. They didn't have a chance of getting a home because there were people that were either paying cash or going with a conventional loan and they had the cash to make up the difference and nobody really cared. They didn't feel like they were overpaying because the market was still increasing. As the market, prices are leveling out, the appraisers, for one, are feeling more pressure to be a little stricter, a little more conservative on their opinions of value and I lost my train of thought there. But there is more chance for those first-time buyers to get in with that lower down payment.
Speaker 2:They didn't have the loose cash to be able to pay their 3, 3.5% down plus the closing cost, because you weren't getting concessions from the sellers. You had to pay all your own closing costs. The sellers weren't going to help you out because they had plenty of other offers that didn't say that. And then, on top of those two categories, they were also trying to pay that $20,000 gap. They just couldn't do it. Or $100,000, or $50,000. I mean, the gaps were not small. So, all of that being said, the market has definitely died down a little bit since that frenzy and real estate has come down as interest rates have gone up. But with all of that, there's still a lot of demand for real estate because there's low inventory and there's a lot of other things going into the market with it all. So sometimes homes are praised and sometimes they don't. And one thing that will never change in real estate is delusional buyers and sellers whether it's the Absolutely Just don't know the market or they want all of the dollars they can, and we don't blame them for that.
Speaker 2:I had one happen a couple of weeks ago. Where there are no comps in the area and these are the most common appraisal missteps is when there's no comparable sales. So everyone's guessing. Everyone knows that they're guessing too and they know that it's going to be a little bit of a crapshoot until the appraiser actually gets there and puts a stamp on it. So they were buying a very unique style home in an area where none of those other homes existed, not even in that city.
Speaker 2:So the appraiser had to go outside of the city to find comparables and when he did, he noticed that all of the comparables that they were pointing to because he asked the agents, the listing agents, what their basis was for putting the property value where they did he pointed to these other sales and he said look, that's on two and a half acres, that's on three acres, that's on 10 acres. Your property is not even on 10,000 square feet of the lot size on it. So with that, the appraisal came in tremendously low. So when an appraisal comes in low on a loan deal, there's only ever four options that can happen. Either the buyers come up, the sellers come down, you meet in the middle or you walk away. That's it. So, with all that being said, it's up to each to negotiate, and if you can't come into a meeting point in the middle, then it's time to move on.
Speaker 1:Just to give you a little hint. Not a lot of agents are willing to do this, but sometimes the agents will lower their commission a little bit to ease the pain. It's something to always ask. We work really hard for our money. It doesn't seem like it. We spend a lot of money acquiring buyers and sellers, and the marketing costs are extraordinary these days, but sometimes we just rather get the deal done and we're willing to kick in a little bit. So that's something that you can always consider.
Speaker 1:What I often get as a listing agent typically is sellers always think their home is worth more than it is. I always want to give that seller the opportunity to try to get the most money for their house, but I say a two week window. Nobody ever wants to relent that two week window. When I tell them the reason I'm pricing it are based on the closed sales they always have a story. They always know somebody in the neighborhood. They always have an upgrade that nobody else has. But with all of that being said, if the appraiser is not going to recognize that, it's not going to make their property worth more than that. So it's okay to test the market. Maybe you're going to get a cash buyer who doesn't care what the comparable sales are but the property is always going to have to appraise.
Speaker 1:Then talking about challenging that appraisal if it doesn't come in, then in this business 24 years I have never gotten a reconsideration of value ever, even when I think they've blatantly done something wrong. For example, I had one the other day that I thought may have been off $4,000 or $5,000 from appraised value. It was off nearly $20,000. Wow, it was a first time home buyer market property.
Speaker 1:There were some updates to some of the bathrooms on some of the sales they were adjusting nearly $10,000 per bathroom. This is something that would be done on a much larger home. It would be a much smaller normally adjustment for something like that. They were also saying that the market was not rising, that it was a stable market. In this particular area we were still up 11 percent from last year. So those are two blatant faults. But we could not get that value reconsidered. Fire and seller were stubborn, wouldn't meet in the middle and the deal was dead. But most of the time we can work through these things, want to make sure you've got a smart agent, a smart lender, behind you and talk about these things up front, so you're aware of it.
Speaker 2:You know. What I found, though, too, is when you're using a local appraiser, it's a little bit easier to negotiate. You know if there's any sort of differences or whatnot, absolutely, and it's a praise there was from Miami.
Speaker 1:It was exactly. You have to have someone who knows the market.
Speaker 2:You have to have someone that's involved in that market, and the problem is when people have so you mentioned this earlier the AMCs, the appraisal management companies. That's what most lenders use in order to coordinate their appraisals.
Speaker 2:It's just easier for it all, and when you're not a local lender, your AMCs could be very spread out. And so you have you go in with that established relationship with the appraiser you have for that area and don't realize that that appraiser is covering maybe three or four counties and they definitely don't know that little town off in the corner of the county there. So if you're actually working with a local lender, they're going to have a very good book of business for AMCs because most of their deals are local. So they have a ton of appraisers that they can choose from. So when an appraiser is not local, if they only have a couple in that area maybe one of them was very expensive and the other one's unavailable well then they have to pull from another county over here in order to make the deal happen on a bright timeline. So if you go with a lender that has a dense book of business in that area, typically your appraisals are more accurate.
Speaker 2:Now, sometimes a low appraisal does work out for the buyer. We don't want to skip right over that because, going back to the story I said earlier, well, everyone was giving it a crapshoot as far as what the value was. This was a huge one percentage-wise to the property size, but it was over a $75,000 decrease or sorry, it was just that $75,000 decrease in value by the appraisal, once they adjusted for all the land differences and whatnot. And the sellers knew that they had overpriced the home from the beginning, so they just went with it. The buyer got a new purchase price at the lower amount, chopped off $75,000 off of their purchase price and loan, and they were very, very happy with it all too and with that outcome, and we proceeded forward for closing.
Speaker 2:So it can happen in all sorts of ways.
Speaker 2:Sometimes it's not a terrible thing when the appraisal comes in low if the negotiations go well.
Speaker 2:A lot of times people will meet in the middle on it all and even then, as the buyer, you're still getting it for less than what you were gonna get it for before. So it's one of those things that every case is different, every story is different. It's just our job to lead you through the process on it all and hopefully help guide you in a way that, as the buyer, is gonna save you the most amount of money and, as a seller, we can help maintain the most amount of money for you as well, by I'm sure that you, rebecca, when you go through and you're looking at the different offers that are coming into the seller, you're prioritizing and explaining to your seller okay, this one's cash. There's no appraisal, this one has a local lender. I would take this over the chase or the. I mean I don't wanna you know bad talk any banks out there, but some of the larger lenders that might not have that, might not be in touch with the area.
Speaker 1:I think people tend to go to banks that they do business with, but they're big, large corporations and sometimes their underwriters are not even in the state of Florida. They might work on the state of Florida. Their appraisers are definitely not necessarily always local and it's also harder if there's any issues or problems because that big bank has, like you know, it's like putting a you know what do they say a square. You know putting a round peg in a square hole. They need things to be perfect. They're big, they can't bend, they can't look at things. I can't stress enough how important having a local lender is. I see big name banks on lender letters when I am the listing agent. I don't wanna do business with them. I know we're gonna have a problem. They also don't know what the taxes and insurance costs here in the state of Florida, which can sometimes throw people off, and that poor buyer's already paid for a home inspection, maybe even ordered an appraisal. So that means they're out of pocket nearly $15 to $1800. They're not gonna be able to get that house.
Speaker 2:So we just talked about this right before this call Another violence that has been pre-approved by a large bank, and it might be a difference of reality and expectation on what's happening up with this new property that you guys just went under contract for because the lender wasn't involved in. You know checking out for those things, but that brings up a good point too is that you know appraisals. You're hiring a third party individual to go out and do a job. Whether you close on the home or not, that appraisal that you paid for that's money out the door, same with the inspections, and you know anything like that. Now there's a lot of sellers, or there are some sellers, that will order an appraisal prior to listing their home. When do you recommend that, or do you not recommend that? What are your thoughts on it?
Speaker 1:I mean, I don't really recommend that, unless somebody's really far off from where I think they should be, because, again, it's an opinion of value. We may never get that same number again. We should post if it's being handled properly, but I just think it's a waste of money for that buyer to do that. We do have some appraisal companies that if we list a property they'll come in and do a pre not appraisal inspection company. They'll come in and do a pre-inspection and that way we should be aware of what kind of issues or problems we're going to find. But that's something new. That's just started and it's really important because there are some items that can be found on an inspection that will now make the home uninsurable. And if the home is uninsurable the buyer can't buy it.
Speaker 1:If they're getting a loan and most people, even if they're buying with cash, they want to be able to insure their home. So there are so many intricacies talking about that large lender, why? Stephanie and I just analyzed this For two days I have not been able to get that lender on the phone to run these numbers in a fast market so I can determine where my buyer is going to be on this. She just ran the numbers when we found some big red flags, and we are going to stop him before he starts spending money. So we are here.
Speaker 2:I did die before. You just saved that money, just in case.
Speaker 1:Right, we want you all to buy homes and be in beautiful properties that you love, but we want to protect your money if we can.
Speaker 2:Oh well, I think that says it all. We got a lot covered today. Thank you guys. So much for joining us. Until next time, rebecca, you got anything else?
Speaker 1:Nope, if you need any information, we are happy to answer your calls, even if you're working with another realtor or lender, reach out to Stephanie or I. All of our information is in the podcast and thank you for listening to. I Love Palm Beach Real Estate Edition.
Speaker 2:Everything out.