All About Appraisals

Speaker 1: [0:00] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. My name is Christian Nossum. I am the host, and I'm also a real estate agent here at the Awesome Nossum Group at Wilson Realty. Uh, with me, I have all my wonderful co-hosts. The one, the only, Mr. Jason Saldarriaga.

Speaker 2: [0:17] That would be me. Hello, everyone.

Speaker 1: [0:20] We have the Seattle native, Reed Watson.

Speaker 3: [0:23] That's me.

Speaker 1: [0:24] And the dog whisperer, Mr. Les Cutting.

Speaker 4: [0:27] Howdy.

Speaker 1: [0:29] Just a howdy out of Les today. That's all. Today, we are going to be talking all about appraisals. We'll go over what an appraisal is, how and when to waive one, uh, when you're making an offer, and what to expect if the appraisal doesn't come in at value. So, let's get right into it.

Speaker 3: [0:46] Absolutely. So what is an appraisal? Basically, an appraisal is when a bank sends a third party, a neutral third party, out to give an opinion of the home based on the value of other comparable properties in the area. So there is an appraisal management company, and after the whole real estate debacle of 2008 and the recession, we got the Dodd-Frank, the Dodd-Frank Act. Lenders and appraisers were making backdoor deals to get better deals, and now it's a blind selection between the bank and the appraiser so that nobody can cheat the system. Even the bank can't talk to the appraiser, so they are out there on their own and neutral. The appraisal happens once you're under contract, usually within the first week to two weeks, sometime after you get your offer accepted. And the buyer does pay for it. It's about $1,000. That's just a rough estimate. Sometimes it's paid out of pocket, but oftentimes you'll see it rolled into the closing costs as well.

Speaker 2: [1:52] Yep. Sometimes no appraisal actually happens at all at the end of the day. This is usually the case if you have a pretty strong down payment amount, at least 20% down. Basically, the lender will put in your numbers in terms of your loan and the purchase price, and there's this algorithm that shoots out whether an appraisal is necessary or not, again, taking into account your down payment, but also the purchase price and how it relates to the market value and that sort of thing. If the algorithm thinks, "Oh yeah, this is definitely, like, way safe. It's definitely worth this amount, if not significantly more," it will come back and say, "You know what? No appraisal's necessary," and you'll get a waiver for that, and it is really nice. Saves us a lot of time, and it's an obstacle that you don't really need to deal with now as a buyer. You might have heard the term waiving an appraisal. If you don't waive the appraisal, then you present an offer at whatever the purchase price is that you set, and if the appraisal comes in $50,000 below your purchase price, you can back out and kind of save yourself. In a really competitive market like Seattle, and quite frankly a lot… most major cities right now, um, in the country, it's not too uncommon to waive an appraisal, especially here in Seattle. You know, the seller really wants to see as many contingencies removed as possible. A contingency, just so you all know, is something in an offer that allows you to back out for a certain reason. So again, the appraisal contingency would allow you to back out- And, uh, get your money back, like your earnest money back and all that if the appraisal didn't come back at the price that you are buying the property for. Because at the end of the day, the bank is not gonna give you a penny more than what the appraisal says. The reason being, if you disappear tomorrow, the bank wants to be confident that they can turn around and sell your property for the price they're effectively purchasing the property for. Now, you can get a little fancy here, especially in Seattle, because things are so competitive. You might have heard horror stories about buyers presenting an offer that's 20% over list price, like $150,000 over what it was listed for. They get their offer accepted, and then it appraises for less than list price, and so they're on the hook for more than $150,000. And that can be pretty tough for a lot of people because it's a lot of money to pay out of pocket in addition to whatever your down payment would've been regardless. Because again, if you waive appraisal and you get your offer accepted, the bank will only give you a loan for the amount of the appraised value. So if you're committed to buying a property that is $50,000 higher than what the appraisal comes back at, you're gonna get a loan for the appraised value and have to pay out of pocket, uh, $50,000 to make that, make up that difference. That's in addition to your down payment. Quite frankly, you kinda have to do this in really competitive situations in order to compete against these other buyers. A lot of them are all cash, a lot of them have a lot of excess capital to use if they need to make up that low appraisal. Long story

Speaker 4: [5:09] short, if you won't do it, somebody else will.

Speaker 2: [5:12] Yep, very true.

Speaker 3: [5:13] Yeah.

Speaker 2: [5:14] Fortunately, we have a way to mitigate this somewhat to, to limit the damage, and there's a form that we can include. It's like a slight contingency, and basically it stipulates that you will cover a low appraisal up to a certain amount. So in other words, if the property is listed for $700,000, you offer to purchase it, and you get your offer accepted at $800,000, you can say, "All right- I'll purchase it for $800,000 and I'll cover $50,000 in a low appraisal. So in other words, as long as it appraises at 750, 750,000, we're good. But if it appraises for 740,000, then we can renegotiate the price or I can back out. And so that's really a, an important tool at our disposal in this competitive market right now where we can, like I said, limit the damage. You think worst case scenario in terms of what you can cover for low appraisal, and you can go from there and still present a, a competitive offer.

Speaker 1: [6:14] Cool. Yeah. So, I mean, if the appraisal doesn't come back at value, you do have some options like Jason was saying. If you have your appraisal contingency intact and the appraisal comes in low, you actually do as a buyer have a few different options. You can either completely back out of the deal and get your earnest money back so you don't lose anything. You can pay the difference out of your pocket to keep the deal together. So maybe the seller isn't willing to renegotiate the price, which is another option. But if they're not willing to renegotiate, you could potentially pay that difference out of your pocket You may or may not want to do that. I don't know. And possibly, but not always, you could ask for a new appraiser to go out there and reappraise the property. We have had situations in the past where this exact situation happened, uh- I was a

Speaker 4: [7:00] part of that situation.

Speaker 1: [7:01] Yes, you were. Yes. Mm-hmm. And it was quite a weird, a weird situation where the, the first appraiser came in. How much low

Speaker 4: [7:10] was it, Les? Like- Oh, it w- it w- it was, it was egregious. It was, like, 60 or 50 grand below. For the area- Yeah … for the area, though. For the area that it was- Yeah … the house was purchased in, so.

Speaker 1: [7:18] Yeah. And, and then we had a second appraiser, and he came back, and it was, like, 25,000 over the asking price- And- or the, the agreed-upon price, so.

Speaker 4: [7:27] Right. And the reason why, too, that we had such a big issue with it is because we had put an offer in on a house that we knew for a fact that was, like, maybe a neighborhood over that had sold for way more than property that, uh, had the low appraisal. So we knew the- Mm-hmm appraisal and the comps were wrong. So that's why we fought so hard for, uh, a new appraisal. But anyway.

Speaker 2: [7:48] Yeah.

Speaker 1: [7:48] Speaking of, let's talk about the agent's role in the appraisal.

Speaker 4: [7:51] That's a perfect segue, Christian. With this situation, sometimes we get out there and we meet the appraiser. What we like to do is we get supporting comps for the subject property, we hand them to the appraiser. Because sometimes appraisers are doing, you know, five, seven appraisals in a day, and they're doing a lot of work. So definitely to alleviate some of the pressure, we give them some of the comps, and, um, it definitely makes their job a little bit easier. In a normal market, before you waive your appraisal on t- you gotta make sure you guys know the risks and potential cost of that. Prior to making an offer that may escalate really, really high, what we like to do is we like to pull the comparable properties, and we like to show you where everything is landing on average. So we look at list to sales price, and then we look at that percentage. However, I will say, though, in a hot market like Seattle proper, it's very hard to gauge that. You can pull the comps all you want, but you just never know with certain properties. Some may go f- uh, 50, 70 over. Some may go 150 over. Some may go 200 over. We do pull comps just so you can get a sense, but it's really hard to pinpoint in Seattle proper.

Speaker 2: [8:57] Yeah. In Seattle especially, we're seeing just such significant month-over-month price increases that, you know, if you're looking at recently sold properties in the area, that is inherently backward-looking. So that might be 90 days in the past. Even if it's 30 days in the past, when this other property closed, there's been now several weeks where the market has continued to appreciate and heat up. So you're kind of late to the party in, in, in that way. So you should look at the recently sold properties in the market, but really also take a step back and just use that as one nugget of information. To elaborate on that, how do you plan this whole appraisal thing- When you're trying to buy a house in a market like Seattle's experiencing right now. I do wanna touch upon really quick how appraisers are doing it right now. Because we're seeing prices increase so quickly, they are considering supportive evidence outside of just recently sold properties. They generally do take into account active listings, the prices that the neighbor's house is currently listed at, even though it hasn't sold. They'll very likely take that into account when appraising the property, and they also are taking into account the offer situation for the house that they're appraising. So in other words If the house that you got your offer accepted on, at the end of the day received 10 offers, even though you went 20% over list price and got your offer accepted, maybe there's five other offers out of those 10 that basically went to the same 20% over list price that you did. And that supportive evidence can really help demonstrate to an appraiser that you're not alone here in valuing the property at what you're purchasing it at. There's evidence. We have the contracts. There's five other people out there also saying it's worth that much. So they do take that into account generally speaking. As a buyer though, I do think it's really important to take a step back and not focus too much, quite frankly, on comparable sales, because again, that's backwards looking. Really consider what it is, what value the house is to you. Obviously use the market, use the neighborhood to determine that, but also what are you comfortable with? Because otherwise, that's how you can get yourself in a pickle, and make a decision that you'll regret in two or three years, or even three weeks or two weeks when the appraisal comes back. Just don't try to compete with the market. If you determine that you can afford the home and then you consider the worst case scenario with a certain low appraisal, don't be afraid of an appraisal coming in below your purchase price, because you can take that into account, and like I said before, you can put in kind of protection to cover a certain amount of low appraisal. Because after all, today's buyers are quite frankly laying the foundation upon which tomorrow's appraisals will be based.

Speaker 1: [12:03] As you can see, there is a lot that goes into appraisals. Uh, I do wanna point out that appraisals are more of an art than an actual science. It is very subjective. Every appraiser has their own take on the market. They could use different comps, like the situation that Les and I had. It really just depends on the appraiser. So that's where, again, we as the Awesome Nossum group, we always try, if we're able, to meet the appraiser at the property to assist them by giving them comps, explain to them what the background was, how many offers were on the table, how high did those offers go. Were we even the highest offer or not? Sometimes, often actually, we're not always the highest offer, but our offer was the one that got accepted because we had better terms. So saying all these things, all this background info really does help the appraiser create their value in their mind. Um, and you know, some appraisers wanna hear it, some of them don't. If they don't, it's no, no skin off our back. We don't care. Um, we'll share the info, and if they don't wanna use it, that's, that's their, their decision. But we always want to at least try to assist the best that we can As you know, we as the Awesome Nossum Group, we always focus on education. And we do this because we believe that if you as a buyer are educated and you understand the pros and cons of the choices that you're making, overall you're gonna feel really good about the purchase, and you're gonna be happier in your home. If you are thinking about buying at some point, feel free to either reach out to us, sign up for our home buyer class, beersandhomebuying.com. They're free. It's only about an hour. We do one a month. Or again, you can just reach out to us directly. You can schedule a time right on our website. We are no pressure. We're not gonna charge you anything to chat with you. You can go right to our website, awesomenossum.com/schedule, and you can just set a time to chat. No pressure, no commitment, doesn't cost you anything. We just really want to help you make an informed decision. That is it. That is our episode all about appraisals. Hope you learned a ton, and we'll see you next time.

Speaker 4: [14:14] Peace.

Speaker 3: [14:14] Bye everyone