Sellers need a listing agent who can handle this effectively:
Becoming a homeowner may be getting more difficult for San Diego buyers.
With multiple offers and low housing inventory, sellers are starting to ask buyers to submit offers without an appraisal contingency, meaning the down payment must cover the difference between the offer and the appraisal, if the appraisal comes in low.
“It is becoming more and more common as the shortage of inventory and the increase in buyer demand has continued through the spring and buying season,” said Maria Peña-Morales, owner of Team Q of Re/Max Ranch & Beach.
“Within the last month, I see it occur even more. The reason I think sellers are requesting it is because they want to remove any chance that the buyer will back out. If the buyers only qualify for a certain dollar amount and the appraisal comes in below, the seller could be stuck putting it back in the market.”
Joe Bertocchini, director of residential real estate at University of San Diego’s Burnham-Moores Center for Real Estate, said this action by the sellers could be a result of the selling “frenzy” that’s going on, with properties “flying off the shelf in less than 24 hours.”
“Sellers are looking for who the most probable close is,” Bertocchini said. “They look at the offers for who is paying all cash or closing with no contingencies, so they can close without any hiccups that might prohibit the sale of the property.”
Soledad Reaves, a real estate consultant with Re/Max Associates, said that in the past three months, four sellers have asked buyers to remove appraisal contingencies from their offers.
One of Reaves’ clients offered $285,000 for a condominium, which was high. The seller said there were plenty of offers and asked the buyers to remove the appraisal contingency.
“If you don’t do that, you’re out of the race,” Reaves said.
In that particular case, her client countered with a lower offer and removed the appraisal contingency. Another bidder offered a higher amount and her client’s offer wasn’t accepted.
In another case, a broker responded to an offer from one of Reaves’ clients, saying there were 14 offers on the property, and the price on the offers reached a level where the sellers were concerned it wouldn’t appraise. The broker informed Reaves of the requested purchase price and said the seller wanted a “significant” down payment and no appraisal contingency.
Once the trend caught on, it started becoming more prevalent, especially within the past month, Peña-Morales said.
“The more people who start to do it, the more it is continued,” Peña-Morales said.
“I think it’s pretty risky business if you’re going that route just because you’re not leaving yourself much of an out when going into escrow,” Bertocchini said.
But with so little inventory on the market and such tough competition, Reaves said buyers are willing to take that risk.
“Some people have been looking for quite some time. They’re tired of looking and are willing to pay the difference between the appraisal value and the offer,” Reaves said.
“I’m also seeing agents that, in their offers, write that they’re willing to pay $1,000 above any of the higher offers. It’s a very discouraging thing for buyers … who (don’t) have that much money, who are just starting to become homebuyers and they don’t have the cash, or have limited cash.”
Buyers who have been looking for a whole year are watching home values increase, interest rates remain low and monthly mortgages compete with what they pay in rent.
Bertocchini agreed that in this situation, most regular homebuyers are not able to move forward without that type of contingency, making this market more difficult for them. The competition with investors is “frustrating” for other qualified buyers, Peña-Morales said. And there’s no appraisal when there are cash buyers.
“The buyers on the market now are seeing multiple offers — 10, 15, 20 offers — primarily in the $400,000 to $800,000 range. And they’re getting beat out because someone else had the same dollar amount but was able to remove the appraisal contingency,” Peña-Morales said.
Peña-Morales said this also happened in 2005 and 2006, when people were willing to pay more than the asking price and remove the appraisal contingency, knowing they had to come up with additional cash.
“My concern is how it affects the housing market. Back in 2005, 2006, 2007, we began to see accelerating, and unnaturally accelerating, increases in sales prices and the appraisal value not being there,” Peña-Morales said.
Peña-Morales said she expects sellers to continue to ask for the appraisal contingency to be removed until there is more inventory on the market.
“Just because it’s relatively new that we’re seeing it, I don’t know if it’s something that’s going to continue,” Bertocchini said. “The way the market is behaving, I think anything is possible. I don’t think it’s bad for the entire market, but I will say it’s going to put an additional stress or additional frustration for individuals who are going to buy homes.”