One of the requirements of obtaining a $15,000 loan from the city of Phoenix to purchase a bank owned home is that the purchase price needs to be no more than 85 percent of the home’s appraised value.
Setting aside the reality that such a scenario is virtually impossible in today’s Phoenix real estate market, such a requirement will do little more than crush further the home values in a given neighborhood. If the intent is for the owner to have immediate equity, the reality comes nowhere close.
Let’s say our potential finds a house. And, luckily enough, there are three identical homes that have sold, all at $100,000 (and for these purposes, we’ll make them completely identical – no adjustments would need to be made by the appraiser.)
What’s the home’s appraised value going to be? Of course, it’s $100,000.
Except the rules of Phoenix’s program say that the home can’t be purchased for more than 85 percent of appraised value. Miraculously, the lender agrees to these terms and sells our buyer the home – we’ll call it Home A – at $85,000.
That’s $15,000 in instant equity, right? Well, not so fast …
Another potential buyer comes along a month later and finds an identical home to Home A and to the previous comps. Enter the appraiser who pulls the most recent comps for this new home, Home B, and finds the last three sales were at $100,000, $100,000 and … yep … $85,000. What Home A appraised for doesn’t matter. It’s the sold price that counts.
Average out the last three sales and now you have a value of $95,000. The buyer on Home A still has $10,000 in equity (with $5,000 of paper equity gone), and others who own the identical home have watched their home’s value fall 5%.
Better yet, the buyer for Home B also is using Phoenix’s $15,000 loan program and the bank, defying the odds, agrees to sell the home for 85 percent of the appraised value of $95,000 – $80,750.
What does that do to the value of Home A? The last three comps now are $100,000, $85,000 and $80,750 for an average of $88,000 and change.
Another $7,000 in paper equity, gone. That $15,000 equity cushion has dropped to just over $3,000 in the span of two sales, one of which the actual sale at 85 percent of appraised value.
This is supposed to be a good thing? Wouldn’t it seem much better to let the market work itself out as it has done for the past few months rather than artificially attempt (and fail) to create equity?
Fortunately, this will remain little more than an academic exercise thanks to the program’s near-impossible requirements. Sure, there may be a lender or two willing to sell for 85 cents on the dollar but as we’ll see in tomorrow’s post, lenders are too busy chasing imaginary high bids to even consider a city-enforced lowball offer.[tags]Phoenix real estate[/tags]