A bank owned home – this one a former model and still model-perfect – goes on the market in north Surprise at a list price of $182,000. More than a dozen offers flood in. Comps indicate that the home might be worth $200,000 on a good day but that doesn’t stop the buyers from climbing all over each other.
Winning bid on the home? $224,000. And that’s where the problems began.
You see, in the quest to obtain the highest possible dollar for the home, the lender seemed to forget about a little detail called the appraisal. (Why should a bank remember that the appraisal’s part of the deal, since the bank requires appraisals before issuing loans?)
With a normal seller I always discuss the looming appraisal – usually as a matter of trying to keep sellers from overestimating their home’s value. My guess is the bank (or more correctly, the bank’s asset manager) never gave a second thought as to whether this home really was worth the $224,000 being offered.
(Stay tuned for a brief aside on free market economics and why Phoenix real estate doesn’t necessarily apply.)
And so the bank accepts the offer at $224,000, with some closing cost assistance for the buyers included. And so the FHA appraiser goes out to the home and offers his opinion of the value of the property which turns out to be the only opinion that matters …
Oh, and the bank’s still paying buyer closing costs.
At this point, the bank could have told the buyer to take a hike but for reasons known only to them (and certainly, the idea that is was the “right” thing to do never entered into it), the bank agreed to lower its price to the FHA appraisal mark. Oh, and pay closing costs when it’s likely they could have found either a cash buyer or someone who didn’t need to be handed an additional $5,000 off the top.
The lender went for the highest offer and ended up accepting $3,000 net under list price.
This past week I had a buyer enter one of five offers on a home in Goodyear. We didn’t get the house. Why? As the listing agent put it, the lender accepted an offer so high “I don’t know how it’s going to appraise.”
If the offer’s bogus to the high side, if the buyer’s looking to be saved by the appraisal contingency, then why accept the offer in the first place?
And on a related note …
Not all lenders seem to have gotten the news that properties are moving quickly even if not priced well under the going market. There’s one neighborhood in Surprise where the REO agents keep going lower and keep selling homes in a 3-day span.
Wouldn’t it seem that if a home can be sold that quickly at price X, that it would sell just about as quickly … maybe a couple of days more … at X plus 1 percent? Especially when these homes are receiving multiple offers?
This would take some forward thinking, of course, and forward thinking rarely gets in the way of a motivated lender and an REO agent spending their next commission check.
Promised aside: Real estate is not a free economic market. Value is not solely the price at which buyers and sellers agree for the simple fact that they’re not the only parties to the sale, unless pure cash is involved.
Lenders have to decide for themselves whether they’re willing to accept the risk based on what buyers and sellers agree upon, which is why loans are based on the lesser of contract sales price or appraised value.
Just because someone’s willing to pay $224,000 for a $184,000 home doesn’t mean the bank has to provide the financing for a vastly overpriced purchase. Nor should they.
But with that in mind, one would hope the lenders selling these homes think like lenders when reviewing the offers that come in the door.
[tags]Phoenix real estate[/tags]