Ordering an appraisal prior to securing a buyer is referred to as a
"sponsored appraisal"
in many parts of the country. If this action is taken, the
question, of course, then becomes: what if the appraisal
ordered and paid for prior to the sale cannot be used after the
home is sold because a buyer's lender is unwilling to accept
it?
The answer is simply this: If the appraisal can be used after
the buyers have been secured there are tremendous advantages
for everyone involved in the transaction; and if it cannot be
used there are still tremendous advantages for some. Either
way, ordering an appraisal prior to the sale does have
tremendous advantages... it's just a question of knowing what
they are. In my view, there are ten potential advantages to ordering an
appraisal prior to the signing of a sales contract for a home
and they are as follows:
#1: Prevents The Termination Of A Real Estate Transaction
It's no secret that every year in this country, thousands of real
estate transactions terminate after the agreements of sale
(contracts) have been signed by the buyers and sellers, because
of unknown appraisal problems.
#2: Provides Unbiased Third Party Opinion On The Home's
Value
Even though a listing agent may have prepared and analyzed
documented comparable sales information and calculated the
fair market swing in value of a seller's home like a skilled
surgeon, there are times when a third party opinion is a
psychological necessity for both sellers and listing agents. In
most cases, obviously it is the seller who may want to know
what a third party feels the value of their property is - this
third party being someone with no direct financial interest in
the home's sale.
#3: Maximum Mortgage Amounts Can Be Pre-Determined
Each year as a result of low appraisals, thousands of real estate
transactions must be re-negotiated - or worse, terminated -
because, as a result of a low appraisal, the mortgage amount
that the buyer has requested and needs cannot be obtained.
Many times, as a result of a low appraisal, the mortgage
amount must be reduced due to the lenders' policy pertaining
to ratio requirements between the appraised value and the
amount they are permitted to lend. If an appraisal ordered prior
to the sale could be used, then the maximum mortgage
amount potentially would be known well in advance and the
offer negotiations could have been conducted more
intelligently. In addition, it would also be known whether the
buyers had sufficient cash and/or liquid assets to cover the
difference between the maximum mortgage amount
permissible and the agreed sales price.
#4: Repairs And Certifications Can Be Pre-Determined
Again each year, as a result of appraisal problems, thousands
of real estate transactions must be re-negotiated or even
terminated because miscellaneous repairs, certifications and
warranties, many unknown and unexpected, are called for by
the buyers' lender or by governmental regulation.
If an appraisal ordered prior to the sale can be used, the offer
negotiation process can be conducted knowing just which
party would be responsible for the miscellaneous items called
for, and up to what dollar amount.
#5: Conversion Of The Appraisal Is A Possibility
Real estate agents should always check with local lenders to
find out what types of appraisals can be converted. For
example, if a Federal Housing Administration (FHA) appraisal
is ordered prior to the sale, and ultimately a buyer requiring
Conventional or Veterans Administration (VA) financing is
secured, the question arises: can the FHA appraisal be
converted to meet the appraisal needs of those lenders?
Listing agents and sellers who agree that it is an excellent idea
to order an appraisal prior to the sale should not only
determine what type of an appraisal should be ordered based on
price range, location and buyer activity, but also if the
appraisal ordered can be converted, should it be necessary to do
so.
#6: Reimbursement For The Cost Of The Appraisal Is A
Possibility
While the cost of an appraisal is usually borne by homebuyers
as a result of their selection of a particular lender, in the case
where the appraisal is ordered prior to the sale, the question
becomes who will pay for it?
In the event sellers pay for the appraisal on their home prior
to its sale, they can always ask the buyers as part of the offer
negotiation process to reimburse them for the cost of the
appraisal, assuming the buyers' lender will accept it, because
cost of this appraisal is normally the buyers' expense
anyway. If not, the sellers can absorb the cost of the appraisal
within the negotiated sales price, as they would if they agreed
to pay any buyers' points, settlement costs or other acceptable
incentives.
#7: Potentially Speeds Up The Buyers' Mortgage Processing
Again, each and every year untold thousands of real estate
transactions experience delays in processing because of
unknown appraisal problems that develop after the sale of a
home. Having an appraisal which has been ordered prior to the
sale and which can be used when the property is sold
potentially eliminates all the appraisal unknowns, thus most
likely resulting in a faster processing of the buyers' mortgage.
#8: Potentially Eliminates The "Amendatory Clause" Problem
Anyone who is familiar with Federal Housing Administration
(FHA) and Veterans Administration (VA) financing should
also be familiar with the Amendatory Clause that goes along
with them. Even many Conventional lenders have their own
Amendatory Clause formulas. The various Amendatory
buyers, sellers and real estate personnel, and are normally
attached to, and made a part of, the agreement of sale
(contract).
Basically the purpose and meaning behind the FHA, VA and
the property comes in at a figure that is less than the sales
price agreed to, the buyers will have no obligation to pursue
the purchase of the property and will not be obligated to
forfeit any of their deposit monies that are being held in
escrow (trust). These Amendatory Clauses also go on to say,
in many cases, that the buyers will have the option to proceed
with the purchase of the property despite a low appraisal, if
they so desire.
This, then, is the basic intent and purpose behind the
Amendatory Clause concept and having an appraisal in
advance. Knowing that it can be used eliminates any potential
Amendatory Clause problem.
#9: Potentially Increases The Amount Of Buyer Incentives
Every home has a fair market swing in value and the basic
concept behind it is that a home has a higher value when the
sellers are agreeable to pay buyers' points, settlement costs
and other acceptable incentives.
There are times that, by ordering an appraisal prior to a sale, it
will come in higher than anticipated. When it does, it can
prove to be a major marketing advantage for the sellers,
listing agent, selling agent and even the future buyer. This is
due to the fact that sellers can conceivably increase the amount
of buyer incentives that they are willing and permitted to pay.
#10: Psychology Of An Asking Price Based On Appraised
Value Is Very Good
When sellers and listing agents can advertise and promote a
home's asking price at or under appraised value, it gives them
a major marketing advantage over other comparable homes
currently on the market especially, for instance, when sellers
are willing to pay buyers' points, settlement costs and other
incentives.
Hopefully, an appraisal ordered prior to a home selling can be
used in the sale of a property, and hopefully the sellers can get
reimbursed for the expense of it. But even if neither happens,
spending money to have an appraisal done prior to the sale can
prove beneficial.
SELLERS NOT REQUIRED TO SELL AT APPRAISED VALUE
Sellers and listing agents must remember that just because
they decide to order an appraisal on their homes prior to the
sale does not mean that they are obligated to sell them for the
appraised value.
If the appraisal ordered prior to the sale can be used after the
sale and the market conditions are such that buyers are both
financially capable and psychologically willing to pay more
for the sellers' home than the appraised value, then so be it. In
cases like this everyone involved in the real estate transaction
still benefits tremendously. Why? Because all of the potential
appraisal unknowns including maximum mortgage amounts
and required miscellaneous repairs, certifications, warranties,
and the like are now known in advance. As a result, these
previous unknowns can be openly discussed during the
negotiation process and incorporated into the agreements of
sale (contracts) should the offer negotiations prove successful.
FINAL COMMENTS
Regardless of a home's price range and regardless of whether a
home will sell FHA, VA or Conventional, every seller and
every listing agent should take a hard look at the potential
advantages of ordering an appraisal prior to the sale of a
property.
After reviewing these ten potential advantages, you'll see that
it makes a lot of sense to order appraisals prior to a sale. If
done, numerous legal problems, frustrations and emotional
anxieties that result from appraisal problems that develop after
the sale can be virtually eliminated.
by
Phil Mitsch
from THE REAL ESTATE PROFESSIONAL