November 14, 2017
While Congress will take many months sorting out a tax plan, we thought we’d remind our brokers about something more concrete – like appraisals. Would you ever give someone a loan of $100 if you knew all you were going to receive back was $20? Probably not. For residential lenders like Orion, all financing requires an independent appraisal of the property's current market value. Our experienced brokers recommend to their clients that an understanding of how an appraisal effects the pending deal can remove some of the worry associated it.
Orion’s clients know that an appraisal is a third-party opinion of value that helps lenders more closely determine the Loan-To-Value (LTV) ratio, one of the most important measures in all lenders' risk management. Here is how the math works: Purchase Price - Down Payment = Loan Amount. Loan Amount / Property Value = LTV %. The property value lenders use to calculate LTV is the lower of contract price or appraised value.
In most cases, the appraisal will support the contract price, especially in the areas where Orion operates. Under the Comparable Sales appraisal method, a subject property can appraise higher than contract price, but never higher than the highest usable comp. When an appraisal comes in lower, however, the LTV calculation uses the lower appraisal number, which means we will be lending a percentage of that lower value rather than a percentage of the higher contract price.
If it comes in lower, the buyer would have to pay more upfront to comply the original contract terms and price. More money could be put into the deal, the difference between the lower appraised value and higher contract price if available. Exercise the Financing Contingency, if there is still time, to terminate the contract and gain the deposits back. Negotiate the terms with the seller. Perhaps the contract price cam be modified or closing cost contributions from the seller can be increased to offset the difference.
An appraisal that comes in low can also be questioned by our brokers or their clients. This can be done by questioning differences in size and features, how recently they sold, distance from the subject property, and whether the comps' neighborhood or community are similar enough to the subject's.
Understanding how an appraisal works can help our brokers’ clients factor in some safeguards for their transaction. If an appraisal falls short of the dollar mark, Orion’s AEs know that it doesn’t have to sink the deal. It's important for both buyer and seller to understand what goes into an appraisal and what their options are if one comes in lighter than contract price. Our AEs have seen all kinds of things happen.