How to Strengthen Your Offer when there are Multiple Potential Buyers

This is not legal advice, and you should not rely upon it.  For legal advice, consult an attorney, not a blog.
'Finance' photo (c) 2012, Tax Credits - license: today’s low-interest-rate, low-inventory, recovering-from-the-bubble housing market, there are more buyers than there are sellers.  This leads to routine instances of multiple offers, where only one buyer will get the home under contract and the rest will be disappointed.  So if  you’re looking to buy, you need to be thinking about how to handle this likely scenario when you find “the one.”  You want to be the sole winner, not one of the several losers.

There are many ways to enhance an offer, many of which are discussed in the link above.  However, these are generally “ham-fisted” attempts to strengthen the offer that are routinely employed by real estate agents and that really are not that effective.  For example, putting down a large amount of earnest money certainly doesn’t hurt, but (a) the seller wants to sell, not keep the earnest money, and (b) presumably your competitors will bump up their earnest money as well.  Accordingly, increasing the earnest money is not a particularly effective way of strengthening your offer.

In a recent post, Ardell discussed the relationship between the “must appraise” clause and the recent increase in housing values.  She suggests that buyers are now waiving the “must appraise” clause in order to strengthen their offer.  In reality, removing the “must appraise” clause from the financing contingency is an ineffectual way of strengthening the offer.  [That said, Ardell is absolutely correct in warning buyers about entering into a contract where they will have to make  up the difference between the sale price and appraised value, a caution that fully applies to this post as well.] If a buyer simply eliminates the “must appraise” clause of the financing contingency, the buyer really hasn’t strengthened the offer at all.  In fact, just the opposite.

Per the terms of the financing contingency, the buyer is relieved of the obligation to buy the home, and is entitled to a return of the earnest money, if the buyer’s lender is unable to fund the loan per the terms of the contingency (most commonly the lender will provide 80% of the sale price).  When the financing contingency includes the “must appraise” clause, the buyer does NOT automatically get an “out” if the home appraises for less than the sale price.  Rather, the seller has the contractual right to “massage” the issue and to keep the sale on track.  If there is no “must appraise” clause, the seller loses this contractual right.  So if the property doesn’t appraise, where the contract includes a financing contingency but no “must appraise” clause, the loan simply does not fund and buyer is at least arguably entitled to a return of the earnest money back.

Why “arguably”?  There would be a degree of ambiguity in the contract about whether the buyer “had sufficient funds to close” if there is no “must appraise” clause.  The buyer would argue that the “sufficient funds” refers to the buyer’s portion of the sale price as set by the contract (e.g., if the contract requires 20% down and the sale price is $500k, then buyer must have $100k on hand).  The fact that the property did not appraise does not change the buyer’s obligations.  Rather, it simply means that if the property doesn’t appraise, the loan will not fund, and thus buyer is entitled to the protections of the contingency.  The seller will of course argue otherwise.

But the goal here is to strengthen the offer, not set up a spitting match with the seller.  That being the goal, the best way to strengthen the offer?  Waive financing entirely.  Does this mean that the buyer is barred from financing the purchase?  Of course not.

Well, not “barred,” but not allowed either.  Absent a financing contingency, the buyer represents in the form contract that the buyer is not relying on any contingent source of funds, such as a loan, to complete the purchase.  So if the buyer simply excludes the Form 22A Financing Contingency from the offer, but is planning on getting a loan, the buyer will be in breach of contract as soon as the contract is signed.  This would allow the seller to retain the earnest money and sign a contract with a new buyer.  Unlikely, but very very possible.  So a prudent buyer should include an additional term in the offer noting that buyer will be financing the purchase.  Thus a pre-approval letter will be essential as well.

There is no prohibition in the contract on getting a loan.  But if the buyer can’t get a loan, then buyer will forfeit the earnest money. An offer without a financing contingency is considered a “cash offer” by sellers (and their agents).  This means that the appraisal is irrelevant in regards to buyer’s obligation to complete the purchase.  And Ardell is right, THAT is the seller’s goal, because bidding wars among buyers can elevate the price beyond “market value.”

Sellers don’t want the transaction to derail because of a low appraisal.  But you don’t get there simply by eliminating the “must appraise” clause.  You need to forgo the financing contingency entirely. Which of course increases the risk to the buyer’s earnest money.  If the buyer forgoes the financing contingency but must finance the purchase, and if the financing fails for ANY reason, the buyer loses the earnest money, period.  In other words, the risk of a failure of financing lies on the buyer, not the seller, where there is no financing contingency.

If the property does not appraise for the sale price, the buyer will either have to go out-of-pocket for the difference (as noted by Ardell) or buyer will forfeit the earnest money.  So if you’re thinking of going this route, make sure you understand and accept this risk.

Should you forego the financing contingency, but offer a small amount of earnest money?  This is a good option, in part because “CASH OFFER!” has such an appeal to sellers (and their agents).  There is a good chance that the seller will not even appreciate the need for a large amount of earnest money absent a financing contingency.  If seller does appreciate that issue, then at a minimum you have a good chance of getting a counteroffer from seller.  And if there are multiple buyers, that is about all you can ask for.

So good luck with the offers, and strengthen them in a focused and effective way, as long as you understand the resulting additional risk.

When is a Second Appraisal required on FHA Jumbos?

The last few FHA High Balance (aka FHA Jumbo) purchases that I’ve closed, the buyers and agents thought a second appraisal was automatically required.  FHA did adopt conforming appraisal guidelines for declining markets at the beginning of this month, but that does not guarantee a second appraisal.

What triggers a second appraisal for FHA?

  • base loan amount over $417,000; and
  • loan to value equals or exceeds 95%; and
  • the appraisal indicates it’s a declining market; and/or
  • if the wholesale lender/bank decides the area is in a declining market.  

Per Mortgagee Letter 2009-09, FHA defines a declining market as:

“…any neighborhood, market area or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.”

Appraisers are having to determine overall trends for market areas including analyzing the current supply and demand, days on market, absorption rate and the prevalence seller concessions.    For FHA and conventional loans, this is documented on Fannie Mae Form 1004MC which FHA adopted effective April 1, 2009.








Please note that conventional, FHA  and VA appraisals require this new form.   FHA does have additional requirements:

  • At least two of the three recent sales (comparables aka comps) must be within the last 90 days of the effective date of the appraisal.  Plus,
  • A minimum of two active listings or pending sales.   The appraiser must insure the active listings and pending sales have “reasonable market exposure to avoid use of overpriced properties as comparables”.

If  a home buyer is using a FHA mortgage with a base loan amount over $417,000, they may want to consider saving up for that extra 1.51% down so that they are at a 94.99% loan to value and therefore (currently) avoid the potential second appraisal issue and make sure that the lender you’re working with does not have underwriting “overlays” that will impact you.   FHA’s second mortgage requirements can be found on Mortgagee Letter 2009-09.

Regardless of what type of financing you’re doing, know that the underwriter is going over the appraisal with a fine tooth comb.  It’s quite possible that if they don’t require a second appraisal, they may request additional information or comps from the appraiser which could take more time for your transaction to close.   Since this post is based on FHA transactions–we won’t even venture into HVCC here…that’s a whole other can of worms.

Unhonored Rate Locks

Did you know that a locked rate is a commitment for a loan to be delivered to a lender?   Mortgage companies and loan originators are often judged by how many loans they deliver or what their lock fall-out ratio is.   A normal expection used to be around 70-75% of locked loans to be delivered–now I’m hearing reports of 30-40% of locked loans actually being delivered to the lender.  

This is dangerous for mortgage brokers and correspondent lenders.  Why?  Wholesale lenders are cutting back and “cherry picking” which companies they’ll work with.   A significant factor is lock-fall out.  If odds are, a locked  loan is not going to be delivered, why should they work with that mortgage company?    

Sometimes the wholesale lender may be ordering the mortgage company to be “cut off” of future business and sometimes it may be the wholesale lender having their Account Executives that they need to reduce their client base to a certain amount of accounts (as a way to reduce the commission they’re paying the AE’s). 

There can be many reasons for a locked loan not to be delivered, such as:

  • the loan could not be approved because of the property (appraisal issues) or the borrower.
  • private mortgage insurance issues.
  • the borrower decides not to proceed with the transaction.

Here’s how one wholesale lender rates fallout:

  • 0-24.99% = Full approval.
  • 25-34.99% = Monitor
  • 35-49.99% = Watch
  • 50-74.99% = Probation
  • 75% or more = Inactivated.   Good by wholesale relationship with that lender.

Wholesale lenders don’t care if it’s due to the borrower not proceeding with the refi or if it was their underwriting that “killed the deal”…it often counts towards that dreaded lock fallout ratio.

A disturbing trend I heard from a local title insurance company is “double applications”.  Where a borrower is proceeding with a refinance transaction with two different lenders.   If both loan originators have the loan locked, someone is going to lose!   Not to mention, the expense to the title and escrow companies who are working on a transaction a consumer is not going to honor.   The only way this is caught, is if the title or escrow company happen to be the same one that the two loan originators the consumer is using.   Regardless of if both loans are locked or not, it’s unscrupulous behavior.    

Borrowers–please do not have two loan applications going on at the same time with two different loan originators.   When you do decide to lock in a rate with a mortgage professional, understand it IS a commitment.

It's Official: New Conventional Guidelines for Ordering Appraisals

Fannie and Freddie have finally announced (I’m sure to no one’s surprise) the acceptance of OFHEO’s Home Valuation Code of Conduct which bans communication between a loan originator/mortgage broker and the appraiser for conventional 1-4 single-unit family homes.   Appraisals must be ordered through a third party clearing-house of sorts.   I picture this being similar to ordering a VA appraisal, which is not a pleasant process.  

Here’s an example from the Home Valuation Code of Conduct of what will no longer be allowed:

  • requesting that an appraiser provide an estimated…valuation in an appraisal report prior to the completion of the appraisal report or requesting that an appraiser provide estimated values any any time….
  • providing to an appraiser an…estimated…value for a subject property or a proposed or target amount to be loaned to the borrower, except for a copy of purchase and sale agreement.
  • ordering…a second appraisal…in connection with a mortgage financing transaction unless there is reasonable basis to believe the initial appraisal was flawed….

Lack of competition is generally bad for the consumer.  And I see this slowing the process down and possible increasing costs…where is the incentive to be effecient or competitive?  Who will pay the third party clearing house?

This is technincally effective on May 1, 2009; however, lenders are all ready implementing the new code.   This is still very new and we’ll have to see in the weeks ahead how this all works out.

Major Changes with Appraisals for Conforming Loans

This morning it was announced from OFHEO that Fannie Mae and Freddie Mac have agreed to some major changes with regards to how appraisals will be ordered for conforming mortgages:

“…including eliminating broker-ordered appraisals, prohibiting appraiser coercion, and reducing the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages. The agreements also enhance quality control in the appraisal process and establish a complaint hotline for consumers. The agreements include a Home Valuation Code of Conduct that the Enterprises will apply to lenders selling mortgages to Fannie Mae or Freddie Mac. The Code becomes effective on January 1, 2009.”

It’s ironic to me this is eliminating “broker-ordered” appraisals and “reducing the use of captive appraisal management companies” when it was Washington Mutual’s actions with eAppraisal that caused New York Attorney General Cuomo to investigate.

The appraiser I use has been doing his job for over 30 years. I trust him and respect his work. Last year, when he had an appraisal come in low on a property that was in a bidding war with zero down financing, I didn’t doubt him. The agents were furious…even the homebuyer wanted a new appraisal. They wound up buying the home for the appraised value instead of the bid-up price. I wonder if they realize what a favor he did for them by providing a true appraisal? (He’s come in low on some refi’s too). I have to admit, I’m less than happy realizing that I may not be able to rely on using his services for appraisals once the new guidelines go info effect.

I’m concerned that obtaining a conforming appraisal will be very similar to how VA appraisals are done: a crapshoot lottery. This is all well and good as long the appraisers in the pool are all competent and efficient. However when there is no competition for business, will it breed complacency?

I’m also wondering what will happen with the cost of appraisals. Presently, I have a rate sheet from my appraiser and I know how much the cost will be for each transaction after we have loan approval. Unless Fannie and Freddie decide to control what an appraiser will charge, the fees can vary. How will loan originators be able to provide accurate Good Faith Estimates without knowing who the appraisal will be through?

More questions than answers right now…and more changes with mortgages are on the horizon with HUD’s announcement of what the median home prices are due in about ten days.

Update: Fannie Mae is accepting comments until April 30, 2008.

The Northwest: blessed with water,mountains, settings and views. How do you value views?

How do you value views? I don’t know.

Growing up on Capitol Hill is a far cry from acreage, cows, chickens, Llamas and horses. To say my current environment is different from where I grew up is an understatement. The house I grew up in had what I thought was an excellent view looking East over the Arboretum, Madison Park, Lake Washington and the Cascades. I can recall many warm Summers climbing out of my parents bedroom window and inching up the roof on my rear to get a perfect view. Only on the roof ridge could I see Mt. Rainier and Mt. Baker, but they were there. Husky Stadium—the hollowed place my Kansas State University Football ulumnus father (played with the late Harold Robinson, the first African American player in the Big 8 at the time, circa 1952) hated with a passion I can’t describe—was also in view. I don’t know how a guy could hate the Huskies so much and get his Engineering/Architecture degree there, but I just didn’t ask questions. I crawled up on the roof really to see one thing only: The Blue Angels.

When my spouse and I started looking for a larger place for our clan, we couldn’t qualify for squat (code for beer budget with a Champagne taste). I wanted a view, she wanted acreage. Where in Ballard were we going to find that? Where in Edmonds would we find anything like that without a million dollars in my back pocket. Monopoly money didn’t count. Snohomish County is where we found the view and acreage.

Ardell has had some really nice view photos lately on this blog and ActiveRain Blog. Rhonda Porter has posted some great photos of views and water on her blog as well. It reminded me about a post I wanted to make about how to value view property. Since I’m not in the valuation business, I thought I’d ask those who are. How do you value view property?

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CNN Appraiser sues WaMu

The intersection of ethics and real estate meet again

As if WaMu didn’t have enough on its public relations plate, CNN Money reports:

Jeniffer Wertz, who is seeking unspecified damages, says WaMu stopped accepting her appraisals in mid-2007 a month after she reported that her local housing market in California was “declining.”

Evidently, Wertz claims that Washington Mutual wanted her to change her forecast to “stable.”

And on the other side of the coin

Bloomberg reporting that inflated appraisals causing significant losses to lenders.

`You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.”

(and, which loan products might those be I wonder tongue in cheek?)

Former guest at Inman Connect, Jonathon Miller, a sought-after New York appraisal and real estate consultant remarked:

“Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem.”

And more from the Bloomberg article….First American and WaMu working together?

“In New York, Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest buyers of U.S. mortgages. He also sued First American Corp.’s eAppraiseIT LLC for allegedly caving to pressure from Washington Mutual Inc., its biggest customer and the largest U.S. thrift, to inflate values.”

Ethics in real estate: oxymoron?

Moving Forward…

I’ve been a little busy lately, so I haven’t had a lot of time to give an update on some of my favorite conversations around the web… Nonetheless, I’m back for an abrivated version (i.e. only 9 articles instead of the usual 10)…

Beau turned me on to a great article by Jay regarding the 30-year trend for Mortgage Rates… Interesting stuff. Also, don’t miss Jay’s tribute to Harry Ramos

I just got an email from someone at Windermere letting me know about Windermere’s new (beta) mapping platform… This is an update to the beta mapping platform they released a little over a year ago and I think they’ve made some great improvements… Here are some features I like: (1) Simple map-based search, (2) intuitive zoom feature, (3) Simple pop-up interface, (4) the filter tool is relatively straightforward, (5) viewing the details doesn’t require a page reload, (6) same with viewing the “list of homes”, (7) saving, emailing and/or contacting an agent can all be done without leaving the map view (8) simple city, state, zip box allows for easy navigation to distant locations… The only complaint I have is that the design doesn’t feel polished, but considering it is a beta and the technology works well, the design is minor…

Steve Weise also let me know about his map-based appraisal tool he recently released and asked me to solicit feedback from the RCG community… His interface is too GIS-specific for my tastes, but maybe other’s will find it interesting and/or useful.

Clever, but probably too simplistic, Rob let me know about his collection of quotes that compare the great depression to today’s housing market. Any way you look at it, he provides a good read…

Greg picked up the new Move commercials on YouTube… The latest fun news around Move is that my favorite commercial (Search) got picked up by AdForum and is currently displayed on their front page!

I really like how Zachary picked up the ball and started posting videos of his properties… They are not high art, but I think they are darn useful, especially for someone selling land in such a beautiful area!

Sometimes being a great agent means divulging the good with the bad… Osman tells us how people can and do loose money in real estate

I hate homework too!!!

The NYTimes real estate blog is officially dead. (although it is everywhere now, I first saw it on Luxury Sarasota Living). I can’t say I’m particularly sad, because the main editor seemed to have such a thing against real estate agents that his blogging on the subject just wasn’t very interesting… (Marlow also noticed this tendency of Damon).

Appraisal Question

While the buyer is paying for the appraisal, they are paying for it as part of their loan costs. The appraiser is hired by the lender and works for the lender and his/her purpose is to inform the lender. I just saw an appraisal of a property I know would sell at about $950,000, come in at $750,000. The appraisal was for divorce purposes and it was a unique, difficult to value property. Appraising is an artform, not a science. There is no one absolute number pointing to what a home is “worth”.

The reason there is an appraisal is in case you do not make your payments and the bank has to foreclose. If you are buying a house for $500,000 and you are putting $200,000 down, frankly, the appraiser doesn’t have to agonize over the process. The bank is clearly going to be able to sell it for the $300,000 they lent you to buy it. Now if you are putting zero down, the appraiser is on the line in the event you foreclose and the bank can only sell it for $450,000.

You need to determine what the home is worth. It’s great when it appraises and everyone loves those few times when it appraises for more than the sale price (except the seller). But if it appraises “right on”, don’t take that as some great feat. Different appraisers will get different answers. Appraising for different purposes, like to value for an estate or divorce when the house is not being SOLD, will often produce different results than when the appraisal is for a home purchase.