The Crazy World of Appraisals in 2021

Today we are going to talk about appraisals in this crazy market in 2021. Why people are removing appraisal contingencies, what is happening to appraisals and the market, and if you can’t remove your appraisal contingency, what you can do instead to get ahead of the competition.

Ok let’s start by just doing a quick refresher on the appraisal and the appraisal contingency. When you have a loan, the lender orders an appraisal for the buyer which is an independent determination of value. This value is what the lender will actually lend on, since the collateral for your loan is the home itself. If the appraisal comes in at the purchase price, great! You’re good to go.

If it comes in lower than the purchase price, the gap between the purchase price and the appraised value must be made up somehow, either by the seller lowering the purchase price, the buyer putting additional money as down payment, or some combination of the two. If you have your appraisal contingency in place and the negotiation does not go to your liking, you can back out and receive your deposit back in full.If however, you have removed your appraisal contingency, it is expected that the buyer will make up the entire difference of a low appraisal in cash, since you’ve essentially removed all your bargaining power to get out of the purchase at that point in time.

So of course, this is a very good thing for the seller to have, they know they don’t have to deal with any issues on an appraisal, the buyer will just take care of it. That’s why wh en you start to see 5, 10, 15 offers, people that can start removing their appraisal contingency to separate themselves and try to beat other offers. But what’s actually going on here, why is the market pushing so many people to focus on the appraisal if not remove the contingency? Before we get into that though, if you happen to like videos like these, hit subscribe, follow, etc, whatever platform you’re on, that way you can stay up on all sorts of great information related to Los Angeles real estate.

Ok let’s take a small step back again. Due to the truth in lending act, appraisers are restricted in what they can and can’t do. They’re a neutral third party, so the lender can’t even talk to them. Us agents can talk to them, but we don’t have too much influence, really all we can do is make our case by calling out comparables we think are a good fit, that support the value, and make sure the appraiser doesn’t miss any aspect of the property that adds value. If the appraisal comes in below, we can always submit a rebuttal, but there tends to need to be a reason for it. I always fight low appraisals for my buyer clients, and I’ve been successful in the past, either getting the value all the way up to the purchase price or part of the way there, but it's becoming harder and harder. Why is that?

Well, this market is moving very very quickly. It’s a speed thing. There are areas of Los Angeles that have gained over 100,000 in value in the last 6 months. Because of this, appraisers have a hard time finding comparables that are actually closed, ie that are completely sold, to support the new market prices. In most cases, appraisers have to use comparables that sold within the last 6 months and are no more than a half a mile from the property. Sometimes I can convince an appraiser to use a pending comparable that hasn’t closed yet, but it’s getting stricter and stricter. They’re trying to slow the price increases, but at the end of the day, they really aren’t going to do that, but they’re going to do something else important instead.

Let’s say that prices have increases so fast that a comparable that is one month old is now 20,000 dollars under the current market. The appraiser can’t use any comparables that are less than 30 days old, because those properties haven’t technically sold yet, even if their price supports the current purchase price. So therefore, appraised values are always AT A MINIMUM, 30 days behind the current market. That means a home that potentially isn’t worth the current price to an appraiser right now, but will be worth that in a month, two months, etc, the appraiser still can’t say it’s worth that price right now due to restrictions on appraisals.

But what is becoming far more common is buyers are coming in and saying, I don’t care what the appraiser says. I want the house, I want it now, and I have the cash to put down no matter what the appraisal comes back with. Then, if the appraiser says the property isn’t worth that right now, it becomes irrelevant, because in 30 days when the house closes, it will be worth that, and it will be a new comparable.

I’m sure you’re having the same thought that everyone has right now...how long can this last? This simply can’t be sustainable. And you’re right, it’s not, and it won’t be. However, certain things need to happen for the market to slow down.

First, interest rates need to rise. Remember, interest rates determine purchasing power, and with such low interest rates, buyers have a LOT of purchasing power right now. They have more purchasing power than they ever have which helps fuel a lot of these prices. Second, more inventory needs to come to the market. And luckily that is very likely since we are seeing an uptick in inventory in the summer months, and hopefully it will continue into the fall. With cases at all time lows and vaccinations widely available, any fear of selling should soon be gone. Even open houses are resuming, which is a sign of good things ahead.

But even with all that, sadly, the median home price will rise until too many people just get priced out. We will have to see slowdown at that point. People who want to own will need to go further and further out from the city center to find affordable homes. Luckily, work from home situations have significantly expanded the areas people can live, so this is likely going to continue for the near future. To be fair though, there are many people who expected this rise in prices to come. Los Angeles has still been quite a bit less expensive than San Francisco and New York, but the rise in the tech sector of LA has funneled a lot of money into this market. With better weather than San Francisco and New York and still the entertainment capital of the world, its no surprise that housing demand would shift from those areas to Los Angeles at some point.

Ok well that may not seem like all the greatest news in the world if you’re a first time home buyer in an entry level category, but there is a silver lining. Remember when I said appraisers were doing something else important instead of keeping a lid on prices? They’re actually making people pump money into the housing market. See, a major issue in 2008 was that people had little to no down payment, so no equity invested, no skin in the game. When prices did start to dip, they didn’t care about their homes, they just let the banks go ahead and foreclose because their was nothing for them to gain from selling. But now, people have more money than any time in history in the housing market. If something happens and someone needs to sell if they don’t actually want to, they have 100, 200, 300 thousand dollars to protect that goes on the line. They just sell, keep that money, and no foreclosures happen and prices stay stable. It means that even at these elevated prices, we still have a healthy, if expensive, housing market in Los Angeles.

So the question I get asked is, if I can’t remove my appraisal contingency because I just don’t have that much cash, what can I do? Can I even compete?

Yes, absolutely. There are ways of writing offers such that you as the buyer agree to make up an appraisal gap, if it comes to that, of a certain dollar amount. If you can make up 10,000 dollars, that you keep because it’s just going to your down payment anyway, then great! Write that into an offer so the seller knows you won’t just bail if there is a low appraisal, that you’re willing to stick with it and work towards a sale. In addition to that, I have other creative ways of working with buyers that can’t entirely remove their appraisal contingency, but still want to compete against people with significant amounts of cash.

That being said, if all you have is 5 to 10% down and no cash reserves, you may consider sitting on the sidelines until prices steady a bit, because now might not be the right time for you. But, if you have the financial means and you’re ready to stop paying rent and start paying into an asset you own, this market will do just fine for people that want to buy for at least the medium term, 5 to 7 years or longer.

Remember this piece of advice as well: You can always rearrange the down payment to free up money for a low appraisal even after the offer is accepted. If you wrote 20% in your offer, you’re never locked into 20%, you can work with your lender to wiggle things around to make it work. Now, you might end up taking on mortgage insurance for a little while, but if that’s what it takes to get your dream home, it may be worth it to you to do so.

Ok there you have it! Thank you for watching, I hope you learned something about contingencies, and if you did be sure to like and subscribe, and if you found this valuable, I’d incredibly appreciate you sharing this video with someone that could benefit by connecting with me. It’s super simple, and on my website there’s a button to Book A Consultation that connects directly to my calendar.

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