{"id":1284,"date":"2021-06-10T21:51:54","date_gmt":"2021-06-10T21:51:54","guid":{"rendered":"https:\/\/www.eastbaysmortgagebroker.com\/?p=1284"},"modified":"2021-08-12T17:15:30","modified_gmt":"2021-08-12T17:15:30","slug":"appraisal-understanding","status":"publish","type":"post","link":"https:\/\/www.eastbaysmortgagebroker.com\/appraisal-understanding\/","title":{"rendered":"Hot Market Appraisal Strategies for California"},"content":{"rendered":"\n
Word is out, the real estate market is smoking hot right now<\/strong>. This often leads to concern about appraisal issues. What if the appraisal comes in low? Do I really need to “make up the full difference” with cash? What if I don’t have an appraisal contingency, is that safe? Do I have any other options? We’ve actually seen no increase with appraisal shortfalls using our preferred appraisal management company, anywhere in California, but reports <\/em>of appraisal shortfalls, and discussions <\/em>around appraisal shortfalls, have both increased drastically, which is what this blog post is in response to.<\/p>\n\n\n\n To answer these questions, and others, we are going to go over a few real life scenarios, with names and details slightly altered to preserve anonymity. These will highlight a few of the real life options that are out there, options other than<\/span> “you have to make up an appraisal shortfall by coming up with cash for 100% of the difference.”<\/em> If the below wall of text is scary, this will let you skip to what’s relevant to you:<\/p>\n\n\n\n Isabella and Jane<\/span><\/strong> were looking to buy their first home in the Bay Area, Oakland <\/strong>specifically, in the $1m to $1.1m range. The conforming high balance loan limit for 8 of the 9 Bay Area counties (and Los Angeles) in 2021 is $822,375. When they spoke with us<\/a>, one of the things they learned is that that “jumbo” loans (loans over $822,375 in those 8 counties and LA) sometimes have higher rates, are harder to qualify for, and close slower (making them less appealing to sellers and listing agents), compared to conforming high balance loans, so Isabella and Jane decided to put enough down to get the loan amount to $822,375 or less. Instead of “20% down,” they might put 23% or 25% down, just enough to get the loan amount exactly at that limit. Click here for current California county limits<\/a>. We referred Jane and Isabella to one of our local go-to Realtors, so their Realtor already knew “the deal,” but Isabella and Jane did not, so we went over what this means for them.<\/p>\n\n\n\n This means that at some price points, they have automatic appraisal gap coverage<\/strong><\/em>. They were thinking of offering to buy a home for $1,075,000, after having their Realtor run a comparable market analysis (CMA) with them to show them what the home is likely to sell for. $1,075,000 – $822,375 = $252,625. That was their intended down payment, it works out to about 23.5% down. Further, they were worried the appraisal might come in a little short. In fact, the appraisal could come in as low as $1,027,000, and it wouldn’t have any impact on their financing. That’s because 80% of $1,027,000 is <$822,375, and that’s all they want to borrow anyways. When Jane and Isabella put their offer in, there’s no risk that including a provision that they will “cover” an appraisal gap down to $1,027,000 will impact their cash to close, their interest rate, their fees, or anything else. After being preapproved to start the house hunt, Isabella and Jane checked in with us to customize their $1,075,000 offer thusly, and they beat out a few dozen other offers, including one that was later disclosed to me to be for $1,100,000 ($25,000 higher!<\/strong>) that did not have such a provision attached to it. In the end the property appraised for exactly their offer price (this is almost always the case), and they’ve since closed on their purchase, but the zero-risk appraisal gap coverage is what got their offer accepted in the first place<\/strong>. Click here to get preapproved<\/a>, so you can take advantage of this sort of insight when working with your Realtor to craft your offer, and click here if you’re a Realtor who isn’t getting this sort of strategic support<\/a> but think it could help your clients out.<\/p>\n\n\n\n Let’s consider Tyler<\/strong><\/span>‘s successful home purchase in Sacramento<\/strong>. This one is fairly straightforward, and Sacramento price points and scenarios have become normal to us since the start of the Pandemic, due to Bay Area folks fleeing to Sacramento. He had his eyes on a single family home in a subdivision with lots of other similar single family homes; he’d already had his offers rejected by 4 previous sellers, he wanted this house and to be done with it. After reviewing a CMA with their Realtor, it was determined that the home would likely sell for around $560,000 even though it was listed for $490,000 (“listing low” is a common strategy in California). Tyler had a strong down payment, good credit, a good job, and wasn’t looking at a unique property, so he was a good candidate for a possible appraisal waiver<\/strong>. An appraisal waiver is when the automated underwriting system (AUS) determines that there’s sufficient data in existing appraisals already on record to support the contract price, meaning no appraisal is required. Tyler, good planner that he is, let us know two days ahead of time that he would be putting in an offer for something in the mid-500s on that property. We ran the AUS (this requires a full preapproval package to do, click here for a free consultation<\/a> about what that entails, or click here to jump right into it<\/a>) at $570,000 and determined that an appraisal would be needed. We ran it again at $525,000, and got the appraisal waived. We played a little bit of whack-a-mole and established that $540,000 was Tyler’s max purchase price without requiring an appraisal. Tyler’s Realtor called the listing agent, and gave them a choice: “Would your seller client like an offer for $540,000 with no appraisal required, or would your seller client like a $560,000 offer with an appraisal that could very well come in low, perhaps even lower than $540,000?” In the end, Tyler’s offer was accepted at $540,000, which is $20,000 less than he was actually willing to pay, and below the CMA<\/strong>! When no appraisal is required, closing can happen remarkably fast<\/a>. If you’re curious what artificial intelligence has to say about a specific market, you are more than welcome to play with one of our AI tools for free<\/a>.<\/p>\n\n\n\n