Agents, regardless of whom they represent, will go to extraordinary lengths attempting to control the direction of an escrow, to ensure that once opened, their escrow closes. No agent wants to waste their time and their client’s money and emotional energy, only to have a deal go south. There are three primary reasons an escrow once opened won’t close: financing, property condition and the appraisal.
Financing, a buyers ability to obtain a loan, is generally determined long before an escrow is opened. In addition to pre-approval letters from the buyer’s lender and often the same from the listing agent’s lender of choice, more listing agents are requiring the buyer to produce “proof of funds,” documenting the buyer’s down payment. Most purchase contracts also limit the amount of time the buyer has to get fully approved. Once that time has passed, the buyer’s earnest money deposit could be at risk if they fail to qualify.
The property’s condition is less important today than it was a few years ago. Back in the day, it was not uncommon for buyers, during their inspection period, to present the seller with a list of items discovered during the home inspection that they expected the sellers to repair or replace. Now that the market has changed from a buyer’s market to a seller’s, with a limited number of homes to choose from, buyers are still obtaining inspections but requesting sellers to make repairs is often fruitless. In addition, listing agents may require buyer inspections before making an offer, minimize the timeframe for the buyer’s inspections or present the property in “as in” condition. The objective is to keep the buyer in the deal regardless of what property defects are revealed during the inspection period.
The one thing that agents can’t control or influence is the property valuation as determined by the appraisal. It wasn’t always like that.
Prior to the 2008 Home Valuation Code of Conduct, when an escrow was opened the lender would request an appraisal from an appraiser with whom they had a good working relationship and was familiar with the area. If the appraiser was prompt, courteous and “hit the number” they would likely be kept on the lender’s preferred list. That’s all changed.
Today federal guidelines require lenders to procure an appraisal through a third-party appraisal management company, rather than directly hire an appraiser. The AMC then assigns the appraisal on rotation to whoever is next on the list. The federal regulation change had the following effect: It put 25,000 California appraisers out of work. It increased the cost of an appraisal to the borrower by 25 percent and higher in rural areas. It ensured that inexperienced appraisers, willing to work for less money, would get the majority of the lenders business and it made it a federal crime for a lender or agent to attempt to influence the appraiser’s valuation.
The appraisal has replaced property condition and financing as the leading cause of escrows not closing. Here’s why. Agents and lenders no longer can select their choice of the most competent appraiser with whom they have a working relationship. The random selection process by having to place an order through a third party ensures uncertainty of the valuation’s outcome.
In a recent Realtor survey, 65 percent of Realtors reported problems relating to appraisals, 15 percent said the purchase price was renegotiated, 9 percent said escrow was delayed and 11 percent said the purchase contract was cancelled.
“Low appraisals are not reflecting the market,” said Walter Molony an economist with the National Association of Realtors, “because market value is what a buyer and seller are willing to pay.”
Not so, says the Appraisal Institute in a statement titled, “Don’t Shoot the Messenger.” “Buyers and sellers often have emotional value attached to a home or are unaware of the market,” reads the prepared statement. “They shouldn’t assume an appraisal is somehow wrong if it doesn’t match the listing or contract price. There’s no reason to assume the contract price is correct simply because it’s higher than the appraisal.”
Property condition and financing are more easily corrected than a low-ball appraisal. When an adverse property condition is discovered during the escrow period, it can be repaired or the condition waved by the buyer. If a buyer is turned down for financing with one lender, they can shop for a loan approval with another but when an appraisal is lower than the agreed upon selling price, the options are limited.
The process to appeal an appraisal can take months. That’s not likely to happen. The buyer could spend another $450 for another appraisal. Of course there is no guarantee of any better results, particularly when ordering from the same AMC. The seller could reduce their agreed upon selling price to the appraisal, the buyer could pay the difference between the purchase price and the appraised value, assuming they have funds to do so or perhaps the buyer and seller could work out a compromise.
Appraisers say their hands are tied. They have a limited number of comparable sales to use and many of those were financially distressed properties. They also blame the lender’s underwriting department, which acts as the gatekeeper for a buyer’s loan approval. Often, their appraisals are rejected for having too high a valuation and they are pressured to get the work out for much less money after the AMC takes their cut.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.