The Appraisal: 10 things your broker should do

The Appraisal:  10 things your broker should do

Appraisals are sometimes a source of confusion for both Buyers and Sellers, but usually for different reasons.

Review:  an appraisal is an opinion of value prepared by an authorized person.  In Colorado, Appraisers are licensed and regulated by the State. There are different levels of licensure, depending on the qualifications of the Appraiser.

Buyers sometimes think that the appraisal will “protect” them from overpaying.  There is a clause in the contract, after all, that says in effect: “if the appraisal doesn’t come in at contract price, you don’t have to buy the house.”  While there may be an element of truth in that kind of protection (today, anyway), you should stop thinking that.  If you need a reason, please Google “the role of appraisals and appraisers in the Global Financial Collapse of 2006-2008” or something similar.  There was nothing protective of Buyers for a long time leading up to the disaster, and you’ll be better off being a little more skeptical.

Sellers sometimes think that the Broker’s price opinion was an appraisal, or that having multiple offers (or even one offer) is some kind of assurance that the appraisal will come back at contract price.  Actually, there is some truth in the latter – competing offers should have a positive effect on value – but it’s not a given.

Why Appraisals are done.  In residential real estate, they are done to protect the lender’s interest in the property (the mortgage).  To learn more about what can go wrong I this scenario, Google  “the role of appraisals and appraisers in the Global Financial Collapse of 2006-2008”. The appraisal is ordered by the lender and paid for by the Buyer.

What can you do to make sure the appraisal goes the best way possible?  Answer: treat the appraisal just like you would a “showing:”  home is spotless, lights on, curtains open, staging in place (if applicable), etc.

Beyond that, there are several things you should expect your agent to do. The following list is advice from an appraiser to your broker; it’s adapted from “10 Things to Guarantee a Perfect Appraisal”, by Kerry Dunn, founder/chief appraiser at Dunn Appraisals, www.dunnappraisals.com

1)   Show up

Having you, the realtor, at the appraisal really helps everything run better for the appraiser.

2)   Call/Email

If you can’t show up, please make a phone call or send an email of introduction to the appraiser.

3)   Pricing

Show the appraiser the documentation that you were relying on in pricing the property.

4)   Contract

Email or hardcopy contracts are always appreciated as appraisers don’t always get them from the lender. This will ensure that the appraiser has the most recent copy/latest amend-extend of the contract.

5)   Hope for the best, plan for the worst

As with realtors, appraisers come with varied levels of experience. Keep in mind that even the most experienced of appraisers may not be intimate with the market nuances of your property or neighborhood. Educate them with what you know, in 60 seconds or less. If it takes longer than that, put it in writing and give it to the appraiser.

6)   Comps

Don’t assume that the appraiser will identify and consider the same sales/listings as you did. The appraiser may, or may not, consider the same properties in the appraisal, but at least you have disclosed them.

7)   Detail sheet

Give the appraiser a list of all updates and upgrades to the property.

8)   Sketch

If you have a sketch, please share it! Appraisers appreciate confirmation of field measurements.

9)   Just the facts

Share what you need to and let the appraiser do his/her thing. Most appraisers have a rigid property inspection process that needs to be done in silence. There is a LOT of information that needs to be absorbed in a relatively short time span. It’s best to have a conversation at the end of the inspection, not in the middle of it.

 10)  Professionalism

Expect it. Lenders expect their appraisers to look and act like professionals. If they are not, let the lender know about it.

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What’s a Good Comp?

What’s a Good Comp?

“Comps” are Comparable

When pricing your home, or before making an offer on one, you’ll want to make sure the price is right.  To do that, you and your agent will compare it with similar homes that have sold.  Since no two homes are exactly the same, you’ll make adjustments to arrive at the current value. Here’s what matters most . . .

The Ideal Comps:

  • Similar size, model, style, quality of construction and condition.
  • Similar community: proximity to amenities, quality of schools, walk/bike trails, etc.
  • Within a mile of subject property.
  • Sold within the past six monthls.
  • Within 5 years of same age.
  • No more than 20% difference in square footage.

After the Challenging, now the Difficult:

  • Have a reliable formula for adjustments:  know the value of a full bath vs. half, full basement vs. partial basement vs. no basement, bedrooms, one-car garage vs. two, frame construction vs. brick, overall condition including remodelling.
  • Have a formula for market appreciation or depreciation – especially for comps outside the preferred six-month window.
  • Adjust as needed for terms of sale (cash vs. new loan), type of Seller (individual, bank, estate, etc.)

 

 

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How Buyers pick a Neighborhood

For the past several years, the top factor influencing where a buyer purchased a home was the quality of the neighborhood. Convenience to work was the second most significant factor with just under half of buyers citing its importance. Affordability of homes was also very important, with 39 percent citing it as a factor in their neighborhood choice. By family type there are variations in the importance of neighborhood factors. Single females place a higher priority on convenience to friends and family than other family types. Both single males and single females value affordability of homes. Married couples and those with children in the home place more priority on the quality and convenience to schools than other buyers. Unmarried couples and single males place a higher value on convenience to entertainment and leisure activities (source: NAR 2012 Survey of Buyers and Sellers)

Nbrhd_characteristics

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New Home Inspection rules — What every Seller needs to Know

New Home Inspection rules — What every Seller needs to Know

The Old Way:

  1. You sell your home to a qualified buyer
  2. They do a “home inspection” as part of the contract;
  3. Some problems are found but no big deal — the buyer writes you a “notice” and the two of you agree to a resolution using the same form (the notice). You’re all done, nobody else needs to know about it, and the papers you signed didn’t become “part of the contract.”

The New Way:

  1. You sell your home to a qualified buyer;
  2. They do a “home inspection” as part of the contract;
  3. Some problems are found. (Here’s where everything changes . . . ); The “notice” you get from the buyer immediately “relates” to the contract and you get a little warning:
    “NOTE: Resolution of inspection items agreed to by the parties may alter the terms of the Contract and require disclosure by Buyer to Buyer’s lender. Buyer is encouraged to consult Buyer’s lender prior to entering into a final resolution on inspection matters as the resolution may (1) have a detrimental impact on the Buyer’s ability to get the loan; (2) cause delays in the lender’s processing and funding of the loan by Closing; and (3) require further inspections and repairs. Communication with the lender should be in writing.”

    They (CREC – Colorado Real Estate Commission) are warning you the that 2 things have changed and it could mess up your sale:
  4. The inspection “resolution” is now done on a separate form, and it’s definitely part of the contract:
  5. inspections Winston Downs

    That’s the new title of the new resolution form, making it crystal clear that it’s an amendment (part of) the original contract. And that means . . .

  6. You have to show it to the buyers lender.

Why are they doing this?

They (CREC) are trying to protect the public and make the valuation process more honest and transparent.  CREC regulates not only real estate brokers, but also mortgage licensees. The CREC gets complaints from the public, and based on the areas of most concern, they create new rules.  Here’s part of the CREC ‘position’ on this issue:

The Commission has received inquiries and complaints claiming that real estate brokers (“Brokers”) misrepresent property conditions and negotiate repairs in a manner that conceals issues from the buyer’s lender, particularly when the property’s condition would affect a lending decision. The Commission issues this position statement to clarify how Brokers can advise buyers regarding inspection objection issues and maintain compliance with Commission rules and regulations. Brokers must understand that in working with their clients to resolve inspection issues, Colorado law imposes upon Brokers the duty to avoid misrepresentations [C.R.S.§ 12-61-113(1)(a)] and dual contracts [C.R.S. § 18-5-208].

Remember, too, that if your broker is an “agent” of the Seller in the transaction, you (the Seller) have liability for misrepresentations as well.  Another good reason to use an experienced broker:  managing your risk in the transaction.

So they’re tightening up the appraisal/loan origination by making the lenders be more aware of the true condition of the property. Now the lender has two ways to know what kind of shape the home is in:  the appraisal and the inspection resolution.  Bottom line:  buyers and sellers and brokers have to be up-front about repairs to the property, so the financial institutions will have a truer picture of the home’s condition.

The Right Ways to Resolve the Inspection

Maybe the buyer won’t find anything wrong on their home inspection . . . yeah, right.  Here are all the possible ways to resolve unsatisfactory conditions:

  1. Seller repairs prior to closing
  2. Seller can give a credit or concession to the buyer (e.g., pay some of their closing costs)
  3. Buyer can make repairs (after closing, of course)
  4. Buyer and Seller can modify the sales price
  5. Seller can escrow funds or pay a contractor (if permitted by lender)

Avoiding Complications

If your buyer is getting a loan to buy the house, then any of these solutions could cause problems with the mortgage financing.  Before you negotiate one of these alternatives, the buyer should be advised to talk to their lender and find out if the resolutions mightk:

  • have a negative impact on the Buyer’s ability to get a loan;
  • cause delays in the loan processing/funding/closing
  • require further inspections and repairs

Then, once the buyer and seller have reached a resolution, the Brokers can memorialize the terms on the Commission-approved Inspection Resolution form or the Agreement to Amend/Extend the Contract. And, of course, provide a copy to the lender.

More info . . .

Here’s a scholarly and more technical explanation of these issues, from Bruce Jordan (lawyer, mortgage broker, member of CREC forms committee).

 

 

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Best Time to Buy a House

Best Time to Buy a House

This topic gets worked over periodically, and today I heard Mark Di Vincenzo on NPR talking about his new book, Buy Shoes on Wednesday and Tweet at 4:00 – all about the best times to do various things throughout the year. Sounds like a good read. He offers “some timing tips from real estate agents” so let’s see if we agree.

Best Time to Buy.

Mark says January due to cold weather, less competition, fewer bidding wars, and “more motivated” Sellers. He opines that Sellers may be insecure after Christmas spending, and their timing indicates they’re more “willing to risk.” (see also TIME, Real Estate Markets, Oct 10, 2012)

I mostly agree – but some things are different in Denver right now:  there’s plenty of competition for good listings, and more than a few bidding wars regardless of the temperature  (one of our neighbors just got five offers (!) after making a price reduction and it’s 10 degrees outside).  As for “motivation”, it works both ways:  if a Seller has the luxury of waiting until spring to sell, how motivated can they be?  If you’re taking a job transfer, or getting a divorce, or settling an estate, there’s no waiting for spring.  If you’re an investor who did a ‘fix-and-flip’, you’ve still got a mortgage and construction costs to pay back.  So buyers who wait until spring may have more selection, but not necessarily better.

Still, Mr. Di Vincenzo is right about most things:  interest rates are great right now, there’s less competition from other buyers, and nationally inventory is pretty abundant (not so much in Denver, tho).  In Denver, the real paradox is that January is a good time to be a buyer – but not such a bad time to be a seller, either!

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