The views and opinions expressed on the Avoiding Real Estate Turbulence podcast are strictly those of the hosts and their guests and do not reflect the opinions of Century 21 Town and Country, Ross Mortgage or any of their affiliates.

Jon Lafferty:
Hey everybody, welcome to Avoiding Real Estate Turbulence podcast. I’m your pilot John Lafferty with Century 21 Town and Country.

Tony Abate:
And copilot Tony Abate today with Ross Mortgage and we are your real estate pilots.

Jon Lafferty:
We are.

Tony Abate:
We are. Our job is to be your real estate advocate and also make sure you’re educated about the buying and selling process. We’ll keep you informed throughout until we get you safely closed.

Jon Lafferty:
In a real estate transaction. There are many reasons why you can encounter turbulence. Today we are going to talk about the new loan limits that go into effect January 2020. What that means for buyers. Also we’ll talk about what happens when an appraisal on a property comes in below purchase price. What options does a buyer have?

Jon Lafferty:
Let’s talk about the new loan limits and how it might create some turbulence for buyers who are unaware of where those loan limits end and what that means, the difference between standard and jumbo.

Tony Abate:
Sure, yes. It’s an important topic. It doesn’t come up a lot. But your loan limits for the majority of mortgages do get changed on annual basis. You have your three typical buckets, conventional or conforming loans, FHA loans, and then VA loans. What happens is the government entity that has control over these, for instance, on conventional loans it’s FHFA, which is the Federal Housing Finance Agency.

Tony Abate:
Basically what they do is they do an analysis and they evaluate the increase or decrease in home values nationwide. When there is an increase, then the logic is well then the conforming loan limit really should change with that. They compare third quarter to third quarter so that they can start a new year with an adjustment and give everybody some ramp up time.

Tony Abate:
For 2020, for instance, the new conventional loan limit is 510,400. Over half a million.

Jon Lafferty:
For Metro Detroit?

Tony Abate:
That’s nationwide. Conventional is not local specific, if you will. Yes, in certain high cost areas like Hawaii where they get a bump.

Jon Lafferty:
Or Los Angeles or San Francisco.

Tony Abate:
Exactly. Yes, but for those of us in this area, 510,400. That’s an increase over last year’s number 484,000 and some change. That’s as a result of a national price increase of single family homes for 4.9%. We can take that as good news, I would say because it does show health in the market. 4.9% is a nice increase, but it’s not an unreasonable increase. It’s not like the market has gotten away from itself. Just some historic analysis. When I got in the business, it was, let’s see, 202,300 was the conforming loan limit.

Jon Lafferty:
What was the most popular show on television at that time, Flintstones?

Tony Abate:
Might have been or Car 54 Where Are You or something like that.

Jon Lafferty:
Men.

Tony Abate:
` But. Yes, that’s a nice increase. To your earlier question, basically what happened is anything over that limit is considered a jumbo loan. In general, the terms are going to be a little higher on a jumbo loan. Not always, they do ebb and flow but really the important thing for consumers to know it can be a different set of rules of engagement. Qualifying down payment requirements and the like. It’s just as different when you get into that jumbo category.

Jon Lafferty:
When you say different, what do you… What would be an example of a different set of circumstances that may be somebody who’s doing a standard conventional, as opposed to a jambo conventional? If we were taking somebody who’s buying a $500,000 house… I’m sorry. Let’s say they were buying a $600,000 house, putting 20% down and then somebody who’s buying an $800,000 house putting 20% down?

Tony Abate:
Sure. The rate quotes going to be different for one thing. Like I said, it could be higher, could be lower, but it is going to be different. When somebody is comparing rates, that’s an important part of the conversation is, by the way, this is the amount that I’m going to be borrowing and so the lender should then acknowledge, oh, this is a jumbo rate. We have to quote differently.

Tony Abate:
But then the other thing for instance, is down payment requirements. These do tend to scale as you get… not only are you in the jumbo category, but going up from there so the rules can change when you’re up over 750,000 on the loan size. Change again once you get over a million and so on and so forth. Predictably, the larger those loan sizes, the more conservative the terms are going to be required by the lender.

Tony Abate:
For instance, on a conventional loan, first time home buyer, we can do a 3% down payment, help spur home ownership. It allows folks that don’t have a robust savings. The conversation starts with jumbo financing at 5% down. For many lenders, it’s 10% down and usually that’s tied to an adjustable rate mortgage as well. If somebody wants the typical 30 year fixed rate loan on a jumbo, in many cases is 10% down or greater to get into that.

Tony Abate:
A little bit more restrictive but by the same token hopefully that’s appealing to an audience that is buying at that level because they’ve got the financial wherewithal. But it’s important to know somebody is right in that range and hopefully what a lender talks about in that situation is if somebody is really close. I mean, if somebody has a transaction, or maybe now they need to borrow $520,000. It would be in the jumbo category, that conversation could be, “Well, Mr. buyer here are your terms of $520,000. By the way, if you can get to that 510,400 limit, now we go from eating a jumbo loan to a conventional loan. Here’s your terms if you can go to that.” They might conclude, well, goodness, I’m saving quarter percent it’s worthwhile for me to put that little bit extra down payment to get into the conventional loan. So is it always going to be a savings? Not necessarily, but it’s worthy of a conversation?

Jon Lafferty:
Depending on area. Let’s just take this area, Metro Detroit, our loan limit’s 500… What did you say it was?

Tony Abate:
510,400.

Jon Lafferty:
510,000, okay. Let’s say that somebody’s got to get a jumbo loan because what they’re purchasing but let’s say it’s double that. Let’s say they’re buying a million dollar home, and they’re putting down 20%. Then you take that same person and put them in let’s say, San Francisco, and they’re buying a million dollar home and it’s a 900 square foot box with no basement, no garage.

Jon Lafferty:
But properties out there are so much more expensive. When the lender is looking at these two different circumstances. I mean, do they take into consideration area and the house, and if it’s, let’s say… It’s not standard for an area, it’s bigger than anything around it but it appraises, but are those things taken into consideration when you’re talking about interest rate and a lender is trying to judge risk, right?

Tony Abate:
Mm-hmm (affirmative).

Jon Lafferty:
I mean, what else do they consider when they’re trying to figure out interest rate and other things?

Tony Abate:
Sure. For the scenario that you’re talking about there, that’s not really going to drive whether or not the loan would be a conventional or a jumbo loan. Because those limits are… they’re hard stops. That conventional loan is 510,400 regardless of the property type… backup, single family dwelling, okay?

Jon Lafferty:
Well I guess where I was going with that was, you have $2 million properties in two separate areas. One where the jumbo rate is higher. Where jumbo rate starts and one where it’s lower. I guess what I’m asking is when a lender assesses what they’re going to do as far as interest rate down payment requirement, what are some of the factors that they consider? Again, million dollar here in Metro Detroit is a pretty good home. That’s a pretty good size home as opposed to out here. I guess I’m just trying to figure out maybe some things that they take into consideration in judging risk and interest rate.

Jon Lafferty:
I mean, ability to pay certainly a big part of it, but there’s got to be other mitigating circumstances they take into consideration as well.

Tony Abate:
Sure. When you’re talking about location related things, in the cases that you cite, they’re both going to be jumbo loans. A million dollar loan is a million dollar loan, but the accessibility of, hey, this is a million dollars, but it’s in that 900 square foot home because it’s in that desirable area. Versus million dollars because it’s sitting on nice lake front, maybe here. I would say that those two differences would not drive things such as rate and qualification and the like.

Tony Abate:
I think the thing that you’re talking about might serve to cause that lender to look at, is this a property that’s typical for the area?

Jon Lafferty:
That’s where I was going with that.

Tony Abate:
Yes. We’re going to talk a little bit about appraisals. So if that value for that 900 square foot home, because it’s in a very desirable area in California is supported by other homes that have sold in that area, then it’s go full steam ahead, we’re good to go. If you take that same home, and you put it in an area where that’s not the normal sale price, but they imported their wood floor materials from Europe, and they used the most expensive granite that they can and they have gold gilded wall things built in, and that’s what’s driving the price up, then there’s going to be a challenge, of course, because that’s not going to be supported by other property.

Tony Abate:
There wouldn’t be other similar properties like that. We know how this goes. The cost of the brick and mortar doesn’t always support the market value.

Jon Lafferty:
Right.

Tony Abate:
While we’re on the topic of the loan sizes, the other two categories changed as well. So FHA as of the first of the year goes up to 331,760. That’s an increase from 314,827. These are always unusual numbers because of… HUD uses a different formula when they establish their maximum loan sizes. Where conventional loans, where that limit is determined by FHFA and they do it on a national basis. high cost areas notwithstanding, HUD does it more on a county by county or often MSA’s as they talk about.

Tony Abate:
You do end up with these weird… Why is it not a convenient round number? Well, it’s the result of a calculation that HUD does. But this is a nice increase, as you might expect, here in our area dry County area around Detroit 331,760 that would go pretty far. The number of home buyers that can purchase a home using FHA financing but could not purchase a home using other financing is pretty substantial. It’s up to us, of course to get that word out to make sure that folks that don’t think that they could buy, but they could if they look at some of these financing options.

Tony Abate:
Not only can they be homeowners, but they’re not looking at just modest price homes. I mean, that’s… Again, over 300,000, that’s going to be a substantial home. Then VA has made some changes as well. That’s probably beyond the scope of what we can do on this podcast. But VA has technically never had a maximum loan limit, but they did tie their guarantee calculations to the conforming loan size. They took that out of the mix, but they have not increased the maximum guarantee amount.

Tony Abate:
What that does do, if somebody is a qualified veteran, and maybe they want to buy something well over that conventional limit, they want to buy a seven or $800,000 home, they can’t do 100% financing. They would have to make a down payment, but it’s probably a substantially smaller down payment than what they would have to do if they had to embrace a jumbo loan or even a conventional loan if they’re at that break point. Veterans, or anybody who has that VA eligibility and wants to buy a home, they should not stop that conversation just because of the price that they’re in.

Tony Abate:
It may be some degree of a down payment required but there’s not a hard coded line saying you cannot get a VA loan over X. It’s tied to-

Jon Lafferty:
It’s one of the things that I found was interesting. I wasn’t really aware of short time ago.

Tony Abate:
Yes. We don’t see it at times but we talked about it before. If there’s a category of financing that is ever fraught with myths and misunderstandings, it’s the VA loan. The good news is, is that those folks have earned that benefit and are at a point where they can buy a home in that more lofty level, don’t rule out the VA financing. Let’s do those calculations and see what they can do.

Jon Lafferty:
In the number of years that I’ve been doing this, especially I would say, since probably 2012, the VA, whenever you talk to anybody that does loans for those VA loans or is involved on some level with those, you talked to them and their goal is to get a veteran into the home that they want to live in. It’s not too low ball appraisals and create issues where they can’t get into a home. This is me talking, I don’t know anything. I don’t have any inside baseball information, but I will just tell you that in every VA loan that I’ve ever had a buyer with or been on the list side, those VA loans have come in at value or above every single time never had an appraisal issue. [inaudible 00:15:06].

Jon Lafferty:
But it’s just… I think part of it is, if the value can be justified or if it’s close enough, I feel like they’ll figure out a way to make it work. Whereas I think any other appraisers aren’t… Don’t have that feeling that hey, this buyer has to get this home. Now, they really want to help the veterans get into the homes that they want to live in and talk a minute about Tidewater.

Tony Abate:
Yes. That’s the way it should be. These are folks that have earned the benefit. They have a right to use it. It’s not because it’s any sort of a substandard loan or anything like that. The loan terms are very good. These are folks that earned that benefit and great segue because while there might miss perceptions that a VA appraisal is more challenging or harder, that is so not true. In fact, I would argue, the idea of challenging an appraisal becomes easier on a VA loan than it does for any other type of transaction.

Jon Lafferty:
100%.

Tony Abate:
And it’s because exactly what you’re talking about, which is the Tidewater provision. Should we start with that?

Jon Lafferty:
Yes, let’s start with them. We’ll dive into appraisals.

Tony Abate:
One of the really cool things on a VA transaction… Well, back up a step. It’s always a little bit of apprehension on any real estate transaction, hey, we’ve got a motivated seller, we’ve got a great buyer, they’re qualified and then there’s always a spectre of Holy cow, as long as it appraises, everyone’s going to march forward to that closing table make it happen. It’s a necessary piece of the transaction. Of course, the collateral has to support the deal, but the appraisals got to work.

Tony Abate:
What VA does that’s different is they have a provision, as you brought up, is called the Tidewater Provision. The way it works is this. A transaction comes together, we have that contract, it’s time to order the VA appraisal. Far more similarities on what the appraiser actually does on a VA deal than there is differences compared to FHA or… There’s not a secret valuation calculation. They’re doing the same account thing.

Jon Lafferty:
This isn’t skull and bone.

Tony Abate:
It’s not skull and bones. But one of the cool things that happens is the appraiser, like any other transaction, they’re going to do their homework and say, “All right, what do I got here? What’s the subject property made up of? And what are the comps that are out there?” Before the VA appraisal goes to print, and that VA appraiser is making some determination, if he comes to the conclusion that the data is not supporting the value that’s the sale price of the property, then he’s going to invoke the Tidewater provision. Which is just fancy talk of he’s going to shoot up that red flare to the parties in the transaction.

Tony Abate:
The agents, the veteran, the lender and say, folks, the numbers are not coming up with the value that you’re looking for, I’m just not seeing them in the data. Throw me a bone here, give me some information that says, “Well, here’s how we came up with the value.” Of course, the onus thing goes to the listing agent to say, “Well, I put this thing on the market for the seller, here’s how we came up with the value.”

Tony Abate:
The fact that this happens before the appraisal goes to print is so critical, because you and I both know, once that appraisal is printed out, it can be like moving a mountain to change that value. It is so cool that the VA process offers this provision. You could conclude, you know what, it’s easier to contest an appraisal and a VA deal than it is on any other transaction.

Jon Lafferty:
One of the things that I thought was cool is it allows you to upload images of listings that maybe weren’t used or pictures of things that the appraiser should have taken into consideration when determining value. That was one of the things I thought was really cool. So the lender and the appraiser can see what’s being sent back and forth.

Tony Abate:
Right. VA appraisers have to meet certain standards. Usually, they have to have a certain amount of experience and credentials under their belt. These are folks that know the business, but they’re humans. They can overlook something. They can make a mistake. They invoke Tidewater, they put everybody on notice, “Hey, help me out here. If you have data that I’m not seeing, send it to me.” It can be a variety of things.

Tony Abate:
It can be particulars on an improvement that was made of the home, or it might be the comps that the listing agent used when they were helping the seller establish that value. If the appraiser says, “Holy cow. Those are very good comps, and out of those five that you sent me, I didn’t use this one and it’s a really good one.” The appraiser can embed that in his contract, change the value, hopefully it hits the sale price. It’s an opportunity to say, all right, before this thing went to print, everybody was able to contribute some sort of data.

Tony Abate:
Is that a guarantee? No. Does it mean it’s always going to hit value? No but it could change the value. You don’t have that opportunity on other types of appraisals?

Jon Lafferty:
No, you’re right. You don’t. That’s a nice segue. Let’s talk about what happens when an appraisal comes in low and you as the lender have to make that phone call to the buyer to let them know that value came in under purchase price by this amount. What are typically the steps, do you automatically send the appraisal to the buyer? Or do they say can you send me a copy? Obviously, you need their permission to send it to their agent. Talk about the steps when you initially get that back and when it gets released.

Jon Lafferty:
Appraiser turns in the report, and it’s lower in value, who’s it going to for review and when do you as the the loan rep call the buyer to say, “Looks like it came in low.” What happens?

Tony Abate:
Sure. The appraisal is turned in and following protocol it should be reviewed by us as the lender. We’re at that conclusion now and just using round numbers. We’ve got that $200,000 sale price, and the appraisal came in at 185, 190 whatever the case may be. The first person and really the only person that we can learn immediately is the buyer because they’re our client. That’s who we’re doing the loan for.

Jon Lafferty:
At what point? You say review, the appraiser submits it, does it immediately get reviewed? And then once it’s determined, “Oh, yes, there’s no mistakes on here. Nothing egregious. Everything looks good to us. Hey Mr. Buyer…” Is that how it goes? Or is it, here’s the appraisal. You look and say, “Oh boy, we better alert the buyer right away we got a problem. Before we even review this let’s let the buyer know.” How does it…

Tony Abate:
I’ll give you the official way and I’ll give you the practical way. The information should not be released until it’s reviewed by the underwriter. I’ll state the obvious and that’s the reason is, is that the conclusion can change. I mean, if we tell the buyer upon receipt, “Hey, this value is this.” Now we’ll start to turn on that conversation. Then the underwriter has to say, “You’ve got some additional problems that need to be addressed too.”

Tony Abate:
Now we’ve got to stop that conversation that the buyer started and revamp. So really what’s supposed to happen, it should be reviewed by the underwriter first before that happens. In Candor, and I’ll say this on camera. I do give the buyer the heads up before the review. But with that caveat say you really can’t do anything until we get the underwriters rubber stamp. Now, at Ross, what we do is that within minutes ideally upon receipt of the appraisal, it’s going to the underwriter. Okay.

Tony Abate:
Doesn’t matter if we have anything else to review or not because we want that conclusion to be drawn. Now the buyer is made aware and we have some conversation because… You know how the knee jerk reaction goes on the real estate transaction. It came in low, we want it fixed so it comes in right. But from the lenders perspective we need to have some input from the buyer, because if the buyer says, you know what, I was concerned about that. I think that appraiser is more right than not.

Tony Abate:
He may not want to contest that value. That’s always a tricky case by case conversation. Here’s the other reality, the buyers don’t necessarily… They shouldn’t have to know the mechanics of what goes on an appraisal. What they conclude very often is there’s something holding up my deal, and I really want that house I want to close. There is some candid conversation about number one, Mr. Buyer, acknowledged this. The appraiser is saying the value is less than what’s on your purchase agreement.

Tony Abate:
Then number two is, I’m going to suggest that we bring the agents involved in the conversation. What happens in that order, I can’t disclose that value to agents without the buyers permission, for sure. We’ll give that copy of the appraisal to the buyer, and if they want to share it with the agents, they absolutely can do that. But it is delicate. It can’t be an automatic conclusion of well now everybody has to join forces and get that value back up to the agreed upon price.

Tony Abate:
Long story short, the buyer has to say, yes, I think the appraiser is being overly conservative. That’s important to me to close on this house, we need to rectify this problem. Which then leads into your question of what do we do when that appraisal is low and everybody agrees that it should be at a higher figure?

Jon Lafferty:
What’s the best practice? Comes in low. Comes in at 185. [inaudible 00:25:04] buyer agent look at that and say, “I looked at some comparable properties that sold in the area. I think this appraisers off on his determination. I called the listing agent. Told the listing agent hey we’re 15,000.” Now the listing agents reaction is is going to determine if we’re moving forward and if we are, how we’re moving forward.

Jon Lafferty:
You get some listing agents who would say that’s absolutely wrong. I the comparables were there, I left them for them. All the upgrades and everything, there’s no way it can come in at that. Sometimes, as a buyer agent, you can partner with a listing agent and say, “Okay, let’s do this. Let’s craft a rebuttal together and send this back to the lender to forward on to the appraisal for review.”

Jon Lafferty:
Sometimes you have a listing agent says, “Oh, well, it’s not wrong. Seller is not going to go for that so hey buyer agent, if you want to contest that and you want to move forward sellers not coming down at all in value. You better do all the heavy lifting and submit that to the lender for review.” I’ve also been on the listing side where buyers said, “I don’t know what to do. Help me out listing agent.” Well, you got to write a rebuttal. Can you help me out? Can you send me the comparables you used and how you justify them? No. It’s a partnership man.

Tony Abate:
It really is.

Jon Lafferty:
If we’re going try and keep this deal together, we should be doing this together. But whatever I do it anyway. First part of the process. I submit comparable properties that I think the appraiser should have used or I go through the report and pick out some information that I think was missed or may have been written down incorrectly. It happens, everybody’s human. That happens. I don’t think that’s a big deal.

Jon Lafferty:
But I think where sometimes you can run into things that might grab a lender’s attention with, oh, this is… there’s some big issues here. If, as a realtor working on a buyers behalf, if we can find those errors and point them out and make the case that the comparable properties that were used are not the best and closest, but these couple other ones should have… Because one of the things I do like is appraisers will put in their comments underneath the comparable properties.

Jon Lafferty:
Sometimes they’ll use only three properties. Sometimes they’ll use pendings as comparable four and five or comparable five and six. Sometimes they’ll use six solds but the first three are given the most weight because they’re the most like kind. In a current appraisal that we have an issue with, comparable number one, 50% wait, two and three 25 and 25. I’m looking at that and saying, well wait a second, there’s a property a half mile up crossing a major road, similar style, similar siding, similar interior condition. A little bit bigger, 40 square feet bigger, on a basement, two car garage, it’s everything that this house is. Only differences is a new furnace and a new hot water heater and air conditioner.

Jon Lafferty:
You can’t tell me that everything else doesn’t mean the dead house isn’t like kind except for the furnace and air conditioning which you can make an adjustment for.

Tony Abate:
Easy adjustments.

Jon Lafferty:
It’s an easy adjustment. Talk about that from the lenders perspective, when you get a rebuttal that you’re going to send down to the… Oh, and by the way, we should probably back up, right? This is interesting. An appraiser submits a report to the lender, okay. The lender gets it, the lender notifies the buyer, and the buyer notifies his agent. Let’s say that they put a rebuttal together. They send that to the lender, who then sends it to the appraiser for a reconsideration of value.

Jon Lafferty:
I’m not saying that appraisers never change their mind or say, “Oh, I made a mistake. You know what, I’m going to change this.” But I got to tell you, from a lender’s perspective, if he has two or three or four of these, isn’t that going to affect the way a lender looks at an appraiser if he’s constantly adjusting value up or down because of mistakes that he made?

Tony Abate:
For sure.

Jon Lafferty:
The likelihood of an appraiser, of you sending a reconsideration of value to them and them saying, “You know what, I missed that one. I’m going to go ahead and put that in and that’s going to change the value.” The more likely possibility is, “I didn’t add that in because of this and this, and this one’s closer so it’s going to stay the same.”

Jon Lafferty:
So, let’s say that happens, I send it to you. You send it to the appraiser for a reconsideration value. He kicks it back to you and says, “Hell no, no way. Everything’s fine. I use the right comparables. Nothing to do.” Now the conversation is hey Mr. Buyer. We’re stuck.

Tony Abate:
Yes, exactly. Well I will say your experience is showing because you deck that up, right in the order of things that work versus things that don’t work. Here’s what I mean-

Jon Lafferty:
Thank God, I thought you’re going to say it’s the gray hair.

Tony Abate:
Not at all. You’re being… In my opinion, very objective about how that process works. It’s not perfect. It’s a mix of subjective and objective stuff that goes into an appraisal. Like anytime, whether it’s art or a car or whatever, those are the things that come into placing a value on something. In my very simple brain, you’ve got things that fall into three categories when we’re trying to get a reconsideration of value.

Tony Abate:
First you have erroneous information. Hey, you got the square footage wrong. Hey, it’s central irony, I didn’t know that. Data that is indisputable, it should be on there. It’s not on there. That’s the no brainer stuff. So always, that needs to be something that’s checked out. The guy get the data right. The second thing is what you brought up, which is comps whether they should or should not be used.

Tony Abate:
A good appraiser will say, you know what, I really like to lean on the real estate agents for information. If they’re seeing something I’m not, please tell me. Now bad appraisers will say stay out of my way. Let me do my job. But the good ones will say, “Throw me a bone here. Tell me where you’re going.” So, we’ve got erroneous data. We’ve got the inclusion exclusion of cons because it can go both ways. The third category, and this is one that I would say has the most difficulty as a tool to get a reconsideration of value to work is judgment call issues.

Tony Abate:
A judgment call issue would be something like, well, he only attributed this much money to the finished basement, or he only gave this much of an adjustment because it’s got a deck. At that point in time, that’s where we have to say, the appraiser is the one that should have the ability to make that conclusion. We may not agree with it, but he’s the guy. He’s supposed to be unbiased. He’s not working for a buyer or a seller. When they come up with those figures, number one, there’s a couple charts and some reference materials they can use, but really what they like to rely on is verifiable data.

Tony Abate:
Let me give you a real simplistic example. You’ve got a subject property, and then two other… Or three other homes that have sold in the neighborhood that are perfectly identical except for one or two elements. Our subject property has a finished basement. Then there’s an identical home that has sold within the last six months, it doesn’t have a finished basement and another one that does have a finished basement and maybe another one that doesn’t or does whatever.

Tony Abate:
From that data, that appraiser is going to say, “Well, what are the sale price differences?” They were both sold in an open market. No undue influences that I can see us the appraiser. All the particulars are the case, this one sold for $20,000 more and it has the finished basement. I can conclude that the market will tolerate paying $20,000 more for a finished basement.

Tony Abate:
That becomes super easy for that appraiser to now justify how much he makes an adjustment for on that because there’s data that supports it. When the data doesn’t… It’s just simply not there to support certain things and who knows what that might be. It could be a pool. It can be an outbuilding where it’s a neighborhood where outbuildings don’t normally exist. The appraiser has to use his experience from that.

Tony Abate:
What are they going to do if that data doesn’t exist, they’re probably going to be a little conservative. In those situations where you say, “Well, hey, he gave a $10,000 for the adjustment for the outbuilding, and I think it should be 25.” Unless you’ve got something that shows that buyers are paying $25,000 more for a house with a outbuilding, it’s probably an uphill battle. So errors, inclusion, exclusion of comps, and then judgment calls on adjustments are probably the order of things that somebody should look at when they’re submitting a reconsideration of value.

Jon Lafferty:
The only time I come across where there’s a solid argument with something like that is if you’re talking land. The size of a lot, I’ve certainly come across that where acreage wasn’t assigned to proper adjustment value based on other properties. That has a lot to do with location. Figuring out what the cost of an extra acre or an acre and a half parcel versus a half an acre or a third of an acre. There’s definitely some value there.

Tony Abate:
Sure.

Jon Lafferty:
Other times is a house on a lake where another house has not sold on that lake in five or 10 years. Now they hit… How do you determine the value of that house on that lake when nothing else is sold? You’ve got to find other lakefront property, and then try and determine is it more valuable to be a lakefront on that lake? It’s a private Lake, no public access, or is it more value to be on this lake which is public access?

Tony Abate:
Yes, it’s tough.

Jon Lafferty:
I see those judgment calls and I definitely have come across some rebuttals due to adjustments percentages. As a general rule, does an underwriter have a limit as far as adjustment percentages that they like to see an appraiser play in and if anything above that it raises red flags?

Tony Abate:
Well, yes and no. First off, things like adjustment limits and location distance and time of sale used to be fairly hard coded. It was really hard for an underwriter to sign off on something when appraiser went outside of this. What Fannie and Freddie has done over the last handful of years, they said we’d like to stay within certain tolerances, but if it makes sense to go beyond those things, and it could be size, the adjustment, time of sale or location of the comp, then Mr. appraiser or miss appraiser tell the story.

Tony Abate:
Tell why you’re exceeding these kind of things. That was a good win, probably, first and foremost for the appraises. We want them to be our eyes and ears and if they can justify us a value based on something that is logical, but it’s outside maybe the suggested tolerances, all day long an underwriter can sign off on that. It’s basically Mr. and Mrs. appraiser support yourself, tell your story. Tell why you did this or why you didn’t do this.

Tony Abate:
Another thing that comes up is comps that are out there that didn’t get used. What a good appraiser will do? Hopefully to avoid the time and the work for reconsideration is someone’s going to ask me about this comp that sold right across the street and why I didn’t use it.

Tony Abate:
Okay, it’s a comp that won’t show up on the appraisal, but in the comments, tell why you didn’t use it. There could be a very legitimate reason. It could have been a completely different condition at the time of the sale. It could have water in basement at the time of the sale. All those things make it an invalid comp, to a property that doesn’t have those types of deficiencies.

Jon Lafferty:
That will makes sense. Let’s say we get the appraisal, it’s low, and you submit a rebuttal. The appraiser kicks it back and says, no how no way. Everything else to you guys on the lending side looks good in the appraisal report. So now, as a buyer and seller, got some hard choices to make. We can try to open up the negotiation and if maybe the buyer is dead set on either A, paying any additional over the appraised value.

Jon Lafferty:
Let’s take this scenario again. 185 and 200,000. Let’s say that the buyer says the appraisal said it’s 185. We tried to correct value but it’s 185. Hey, mister listing agent, go talk to your seller. It’s 185 he’s going to have to come down $15,000. To which the seller may say yay or nay. Scenario number two is seller does come down. Wants the house sold, doesn’t want to deal with it anymore. Probably feels like it was probably going to come down to price anyways. It wasn’t worth 200. They agree 185, perfect. Moving forward, lenders, happy everybody’s happy.

Jon Lafferty:
Scenario number three. Buyer decides, hey, I want to make up the difference. Seller is not going to budge. I’ve got to come to the table with $15,000 to make this work. “Hey, Mr. lender, I was going to put 20% down on this property. Do I have any leeway? Do I have to bring an additional $15,000? Or is this something we can roll into the loan so I don’t have to?” Talk about that.

Tony Abate:
Yes, that is such an important conversation because in the circumstance that you’re talking about, in almost every case, there’s more than One solution that can be discussed. Somebody is putting 20% down. As a lender, we’re going to base the value on the lesser of the sale price for the appraised value. With that lower appraisal that becomes our line in the sand. Somebody putting 20% down, we can say, Well, you know what, you don’t have to put any additional money down, however, because now you have less than 20% equity. You have to pay PMI on that loan.

Tony Abate:
Then the buyer makes a decision, okay. It’s worthwhile for me to not come out of pocket because I really like this house. Because let’s face it, in the transaction, whose decision of value is the most important? The person buying the house, right? If they feel, hey, I need to make this happen and if the cost of me making it happen is by paying PMI, because I have less than 20% equity. I’ll bite that bullet and move forward.

Tony Abate:
They might not do it happily. But there’s even some cool things that she can do with PMI that can…

Jon Lafferty:
Talk about this because I don’t think most people know that.

Tony Abate:
PMI, private mortgage insurance is something that a buyer has to pay when they have less than 20% equity in the transaction. In almost every case, it’s an add on to the monthly payment. But with us and with most any lender, you can pay it as a lump sum. Just done and done. Let’s say we’re in a narrow situation like what you’re talking about. We had 20% equity at the beginning of the deal, but now we’ve got 16% equity because of the low appraisal.

Tony Abate:
PMI is triggered, assuming no other changes are made. The buyer doesn’t want to bump this down payment by $4,000. The seller doesn’t want to come down by $4,000 to maintain that equity, and I’m just pulling numbers out of the sky. So what’s another option? Well, if that buyer has good credit, they can probably get one time PMI for less $2,000 on that transaction.

Tony Abate:
So, the buyer with the help of the agent can say, all right, Mr. seller, we don’t want to change anything. We know you don’t want to come down $4,000 but will you pay $1800 of the buyers closing cost plus that one time PMI. The seller might say, “Yes, if I’m not lowering my price, and we can hit our closing date, and I have to come a little bit out of pocket to make it go. That’s an option.”

Tony Abate:
Now, does the buyer technically have PMI? Yes, but it’s one and done. It’s in the rear view mirror. It’s not adding on to his monthly payment. He didn’t have to increase his down payment. He doesn’t have that additional surcharge in his monthly payment and the seller paid some closing costs that at the end of the day to keep a deal together are not that high. It’s a cool technique. It really is.

Jon Lafferty:
It’s one that I don’t think it’s talked about much either. Those aren’t typical conversations I think they should be.

Tony Abate:
Yes, and boy can an agent really look like a hero and presenting that as a solution when people are talking many thousands of dollars, and you can really close that gap with just a little bit of out of pocket money. It’s got to be the right situation.

Jon Lafferty:
Sure, yes.

Tony Abate:
I mean, that the appraisal comes in a little low, we’ve got that buyer who’s got really good credit. But boy the cost of conversation is nothing. That’s avoiding turbulence.

Jon Lafferty:
That is another way to avoid turbulence, right. Another option with a low appraisal is that you got a seller and a buyer who are willing to make the deal happen. They meet somewhere in between 185 and 200. Whatever the seller is willing to come down and the buyer’s willing to come up. They meet somewhere. They agree to it. We’ve got a new purchase price. Buyers happy, sellers happy. Everybody’s moving forward.

Jon Lafferty:
The last thing that could happen is that… On a conventional loan only is… We should talk about this as an aside. On a conventional loan, if you as a buyer decide that I think this appraiser sucks, I think he came in low. The comparables were there, my agent showed it to me. He didn’t reconsider value. I’m not happy with this lender. I’m jumping ship. I’m going to lender B and I’m going to do an application with them.

Jon Lafferty:
Lender A I’m just going to leave on the sideline, I’m going to ghost them. No longer talk to them. Lender B, let’s get the paperwork going and let’s get the appraiser out. Let’s get the new value. Sometimes it comes in higher, sometimes it comes in lower. You just don’t know. It’s a roll the dice but those are the main options when you’re dealing with a low appraisal. But let’s talk about an FHA loan appraisal.

Tony Abate:
Right, excuse me. The remedies that we talked about are similar with FHA. But going to another lender is not something that is really an option. It’s done that way on purpose. What happens is FHA loans, when somebody applies for one, one of the things that the lender does is that we request a case number from HUD. That case number is property specific. If we have the scenario you talked about, the appraisals come in low and the buyer says, “To heck with you guys as a lender. I don’t think you’re treating me right. I’m going to go to the next lender.”

Tony Abate:
When the next lender goes to pull a case number on that property address, there’s going to be a flag that says there’s already one out there. The lender has to basically adopt that case number. We do a case number transfer from lender A lender B. If lender A did their job right, the other realization is, “Oh, by the way, there’s an FHA appraiser attached to that case number. You need to use that one.” Running to another lender is not the option on an FHA transaction, it just doesn’t work.

Tony Abate:
There needs to be that more in depth conversation with the parties and the lender to say is there a remedy to this appraisal.

Jon Lafferty:
Lets to add to that further. This buyer A who’s FHA gets an appraisal. Appraisal comes in low, buyer and seller can’t work it out. Buyer A goes away. Buyer B comes steaming in when the house goes back on the market. He’s also an FHA buyer. He says, “Hey, let’s get the thing rolling. Let’s get good on this.” Goes in… By the way, this would only happen if you had a listing agent who didn’t know what the heck they were doing.

Jon Lafferty:
Buyer B rolls in and writes an offer, seller accepts. Lender goes to pull the case file or goes to file for a case number and says there’s already one here. Oh, wait a second. Okay. What does that mean Mr lender. That there’s already a case number assigned to this specific property. What does that mean for me?

Tony Abate:
Well, could be good news. Your transaction could go more quickly because there’s already a completed appraisal that can be transferred. I mean, the buyer still has to pay for it, but they can be transferred to that new transaction and used accordingly. The arguably bad news on the seller side is that value stays. If the listing agent is on it’s game and there is recognition of what that appraised value was. If they go back to the market, because the old one did not close and they’re willing to accept an FHA, then that candid conversation with the seller is, “Look, this is your value. That appraisal is going to come up unless we go to sleep and put this house back on the market next year or something. Four months to be accurate, but that’s the value so we just have to acknowledge that.”

Tony Abate:
Because in HUD size and in the lenders eyes, barring some sort of challenge, that appraisal is valid. It’s got to be considered. It’s just something to know for FHA buyers and certainly the agents. Most do but…

Jon Lafferty:
Most do but sometimes… I want to say you and I had a scenario on a house about two years ago, where first buyer fell through and we wanted… The seller was okay. Just didn’t necessarily like that buyer the first go round and was okay with taking the FHA assigned value. Getting that loan… Getting that number transferred over to the other lender, he had to write out of pocket the cost for the appraisal.

Jon Lafferty:
Then I… I’m pretty sure that that lender wanted a fee as well. A transfer fee over to the new… 152 bucks.

Tony Abate:
Yes, some sometimes lenders will take it personally that their deal did not close and will attempt to do such things. Now they have to be made whole. I mean if they’re sitting on an invoice with an appraisal, they either have to know that the appraiser has been paid or they had to be paid so that they’re not just stuck with that appraisal bill. Short of that, huds expectation is that that lender is going to be expeditious with transferring that case number in the appraisal. It doesn’t always happen, right?

Jon Lafferty:
Yes it doesn’t.

Tony Abate:
We can sic hot on them but that’s not an overnight process either with that sort of thing. So yes, it can get a little tricky.

Jon Lafferty:
Any special thing with VA?

Tony Abate:
Well, I’ll circle back to the good news that we talked about before and that’s the time Tidewater process. That is huge.

Jon Lafferty:
Let’s say that doesn’t fix it. It’s still low value. Does a VA loan value stick with the house for four months?

Tony Abate:
It does. The VA appraisal does stick with that property. It’s actually six months on a VA. It does stay with that property. It’s just something to know. The good news is that I would say that all parties are probably better informed because of that Tidewater process of what the outcome has been. Here’s another thing. If everything is canceled, and that appraisal never happens… Because remember, Tidewater is a situation where [before it’s accepted]. Right.

Tony Abate:
But if that goes to print, if it says, “Hey, look, thank you for the information. Here’s my appraisal.” It’s there. It’s stuck to that property for that period of time which is typically the case because unless people know, hey, this appraisers, right, we don’t have a chance it typically doesn’t get canceled out.

Tony Abate:
It’s just something to know, the appraisal process is not perfect, the best thing that can happen is certainly working with an agent that understands what appraisers have to do. It’s not so different from listing the property, you’ve got to be able to support that figure. Then just working with partners that know those steps, here’s what you have to do, and it may or may not work. So have a plan B in place. That’s the reality of it.

Tony Abate:
It’s an important part of the loan, right? It’s the collateral, it’s the security for that mortgage. This down payment count, this is probably something to throw in. Yes, if somebody is making a 50% down payment on that $200,000 transaction, and it comes in at 190 or something. As the lender, we can still proceed. We saw ample equity in that deal without changing anything. The one thing we ask is for that consumer to acknowledge, “Hey, I get it. The appraisal came in low. I’m proceeding and I’ve been made fully aware of what’s going on.”

Jon Lafferty:
Doesn’t happen a lot but-

Tony Abate:
Right.

Jon Lafferty:
Those are cake scenarios.

Tony Abate:
Yes, that’s easy. If that’s a big problem of the day, then we’re having a wonderful day.

Jon Lafferty:
So easy. Yes, exactly. Well, I think we touched on just about everything that scenario wise happens when you end up with a low appraisal. I feel like a better educated buyer out there and seller. When stuff like this happens we’ll be able to navigate the usual you go to your corner, I go to my corner, and let’s duke it out and figure out what’s going to happen. It doesn’t always have to be that way with some patients and with some… An agent with some knowledge on steps in order to get things in place.

Jon Lafferty:
Sometimes you can overcome that low appraised value to make a deal still happen and get both buyer and seller to the closing table.

Tony Abate:
Right is not automatically a dead deal by any stretch.

Jon Lafferty:
There are definitely options.

Tony Abate:
Yes, absolutely. The conversation.

Jon Lafferty:
Yes, this was fun. I’m glad we had a chance to talk about this.

Tony Abate:
Yes, we talked about this before. Maybe on a future episode we’ll have a… Do we call them episodes? Future podcast we’ll-

Jon Lafferty:
Well, season two… We were talking about in season two having an appraiser out to just pick his brain on different things that he looks at and where he comes up with considerations for value and percentages for different things that homes have and don’t have, square footage. I’m always curious about that. “Hey, how did you come up with that per square foot number to figure out the difference in credits and deductions for this house is bigger than this house.” “Oh, well I got it from the tooth fairy.”

Tony Abate:
Hopefully not. But yes, it does flag some conversation for sure. That might be a podcast where we can have some listeners send us some questions in advance. We could have the appraiser address those. Just [inaudible 00:54:10].

Jon Lafferty:
That’s a really good idea. Why are appraisers afraid of realtors meeting them at the house? We’re not all going to give you comparables and beat you up for what we think the value is.

Tony Abate:
It’s a shame when that happens because I still maintain a good appraiser welcomes that type of dialogue.

Jon Lafferty:
Yes, I agree with you. Well, hey, Happy New Year.

Tony Abate:
Yes, absolutely.

Jon Lafferty:
Have a Happy New Year and we’ll see you guys next year in 2020. We’ll start season two and looking forward to a lot more fun discussions, some great guests and looking forward to answering user… questions from you guys out there.

Tony Abate:
Happy New Year.

Jon Lafferty:
Happy New Year.

Tony Abate:
Thank you for listening to Avoiding Real Estate Turbulence. If you’d be so kind to subscribe and review and rate we would appreciate it. Please share with your friends, family and co workers that they too can find us on Facebook, YouTube and avoidingret.com, where you’ll find our contact information and every episode. You can also find us on Apple podcast, Google podcast and Spotify.