I’d like to touch on mortgage contingencies in this month’s blog about mortgages.
I’ll address rates in the “market” section, so never fear.
Since 2008, we’ve seen buyers, especially first time buyers or studio/1BR buyers asking for mortgage contingencies.
This is not happening with every purchase,
but I am not surprised to see appraisals coming back from time to time a bit below the agreed upon price.
Some buyers are concerned that they would be “overpaying” for an apartment if the appraisal doesn’t come back at the contract price.
First, a seller should only agree on a mortgage contingency up to 75% of the purchase price, or 5% less than what is standard
current lending practices (80% financing), if need be.
Even better,
5% less than what the building allows for financing- if a building
allows for 75% financing on the contract price, a mortgage contingency should be for 5% less than that- or 70%.
Want to leave your deal to Him?
Another request from a buyer would be an appraisal contingency.
I am very much NOT in favor of allowing
this.
It’s absolutely insane for a buyer and seller to put his or her deal in the hands of the guy making $350 on the appraisal.
He gets paid whether the deal goes through or not.
I just don’t think that an appraiser has the crucial data available to him- past closed sales are already 3-12 months out of date (for condo and cooperative deals) and are fully out of touch with the current market.
An appraiser doesn’t see the comparables he is using- other than calling a broker or looking at photos.
We all know how misleading some apartment photos can be – there is so much room for error here, especially in undervaluing an apartment’s contract price, and OVERvaluing a terrible apartment that ultimately is a bad comp.
Because someone sold an apartment in a fire sale, an estate sale, a job move, a divorce- there are a million reasons why an apartment sold for too low.
A unit that is not renovated will sell at a much lower price than the same apartment, completely renovated.
To put it another way- a gorgeous, renovated apartment trades as a premium.
Why would a buyer run screaming for the hills when this happens?
There simply an information mismatch between the market and an appraiser- a buyer should realize that a great apartment in the greatest city in the USA will have demand- these apartments don’t come up every day.
A selling broker and a buyer’s broker need to make sure a buyer understands the dynamics here.
If you only have to bring your toothbrush to an apartment – the euphemism for a sparking new apartment- you don’t have to pay hotel tax, but you do pay a bit more.
We’ve been able to put deals together or keep deals together by reassuring buyers that they are STILL paying 10% below the top of the market.
Qualified buyers aren’t creating these issues- it seems that attorneys and appraisers are.
Five years from now, most buyers
will be
thrilled to have bought their apartments at the “bottom.”
We’ll do our best to make sure the deals go through!