What happens if the appraisal comes in low?

Good question. I had just that scenario happen to my buyers recently. It's the first time it ever happened to me.
The property in question happened to be in an older part of town, where homes are being bought, fixed up or rehabbed and lived in. There is still solid appreciation in this area and the last thing I was worried about on this particular transaction was the home not appraising for the purchase price listed in the contract. In fact, I told the buyers I thought they had an easy 10-15K in immediate equity.
The bank, however, felt differently.
More to the point, the appraiser hired by the bank felt differently and put a number on the property almost 8% less than the purchase price we had negotiated.
It wasn't a fly by night appraiser either. It was a company many banks use to do their appraisals for mortgages. I felt they didn't do the home justice for a couple different reasons:
1) The lender and appraiser, in my consideration, weren't very familiar with the area and the appraisal was ordered very late in the process, meaning it had to be done at the last minute and be done quickly.
2) As a result, I felt they didn't appreciate the neighborhood nuances of location and how much each degree of rehabilitation adds to the home. The comparable properties the appraiser used, while similar to the home in question, were way off in other ways.

Regardless of why it happened, my buyers were not able to purchase the home at the agreed upon price which they felt very comfortable with because the appraisal came in low. The seller was not willing to sell it for 8% less than the agreed on price. In the end, my buyers have had to go to another lender and so far, so good. This lender works in the area regularly and has been able to come up with what will probably turn out to be an even better financing package without any worries in regard to appraisal.
The original bank was just doing their job. They knew the couple purchasing the property, liked them and had them approved for an even bigger purchase should they chose to go that route. They can't lend on a home that doesn't appraise for the contractual purchase price because that property is what is securing the loan. If the home isn't worth the money they're lending for its purchase, even if they buyers are completely comfortable with the purchase price, they can't get their money back should the buyers default on the mortgage.
For most banks, it's that simple.
It's possible a mortgage broker familiar with the area could be more relaxed when it comes to an appraisal that's low or maybe they may have the ability to be more creative in the financing to secure their position.
It all goes to show that even if you and your Realtor have gone over the comps and feel good about your purchase price, love the home, and are happy about your terms, it could still not end up closing because of the appraisal.
Questions? Call or email me.

15,704 PROPERTIES ON THE MARKET

As of this writing.
That's a lot of properties. The average days-on-market in your area has no doubt also been slowly creeping up in the 2.5 months since I declared it a buyer's market out there.

Comments for this blog

Revised 10-21 - I have to change it again as the spammed comments continue to roll in. Now, anyone can post comments once again but you have to pass the type-in-the-word test. This should eliminate further comment spam. Thanks for understanding.

I am sorry to say that I have had to change the settings for those leaving comments to my postings. Previously, anyone could leave a comment and while not too many comments have been left during the life of the blog, I feel it's important to keep it as accessible as possible.
Over the last ten days or so however, the comments have been filling up with spammed comments left by some irksome marketer I imagine.

While I see what I can do about that, please feel free to continue to post comments whenever you like but be sure to register with Google's Blogger first. Sorry for the inconvenience. Also, remember to visit CentralOhioRealty.com and to continue contacting me whenever you have a question about the Columbus Real Estate Market or Columbus Realtors.

Also, remember that I cannot edit the comments. At least I don't know how if I can. I also can't delete them so A) Be Nice and B) Feel free to speak your mind.

Franklin County Reappraisals

A lot of home-owners living in Columbus have received, found out, read about or heard that their properties tax appraisal has gone up, some dramatically. This has many Columbus Home Owners up in arms and outright alarmed regarding what the new tax appraisals will mean to their monthly mortgage payments.

Those who seem to have gotten 'hit' the hardest are in quickly appreciating neighborhoods like Italian Village, Olde Towne East and Merion Village. Homes here have significantly increased in value and so have their tax values. It's one of those things that everyone prefers not to think about and hopes never happens but it has happened and beginning in January, it may start effecting the bottom lines of mortgage payers everywhere. Even rents may go up to help defer the updated taxes associated with rental properties.

At the auditor's site, you can view your new tax appraisal and plug in the number to receive an estimate of what it means to your checkbook.

This just in from the Franklin County Auditor, Joe Testa . . . .

An Open Letter to the Members of the Columbus Board of REALTORS®
Joe Testa Franklin County Auditor

Some questions have been brought to my attention pertaining to my office's Tax Year 2005 reappraisal of the 400,000+ real estate parcels in Franklin County. There seem to be three main points being asked by REALTORS® which I will address here.

The reappraisal process: It is important to note that the mandated reappraisal in Ohio is a process which takes more than two years to complete, and includes data collection, site visits to each parcel, a review of sales transactions over the prior three-year period and an opinion of value set by a licensed appraiser. Sales from 2002, 2003 and 2004 were used in the establishment of the new values, which

reflect the property's value as of Jan. 1, 2005. This is unlike the traditional "fee appraisal" which generally only considers the last six months of sales information and usually includes a thorough interior as well as an exterior inspection of the property during which improvements or lack thereof that could affect the market value of the property are discovered.

So far Franklin County property owners have been notified of the new tentative values for their properties and Informal Reviews are being conducted at 28 locations throughout Franklin County. We are meeting with property owners to address any questions or concerns they may have. At this point in the process we are no longer looking at 400,000 parcels but just the ones being brought to us. While the sales ratio analysis conducted by the State Tax Department confirms that our work is always well within appraisal standards, this analysis is being conducted of the aggregate of all real estate sales in the County. That does not mean that some individual parcels wouldn't need to be adjusted in value once more specific data is brought to our attention.

Property owner input is an important part of this process due to the fact that we rarely get inside the 400,000 properties and we are not using 2005 sales in setting the Jan. 1, 2005 value for obvious reasons. This process will not be concluded until late in the year after all final adjustments are made. If REALTORS® believe that a client's tentative value is too high for the market after they have done their own analysis, they should encourage the owner to visit one of our review sites and to bring that analysis to us. We want the value to be a fair and equitable reflection of the market.

On-Line Tax Estimator: I have taken the position, as you know, to put every bit of data I have available on the web site regarding our appraisal process, tax calculations, etc. We created the tax estimator so that a proposed sale price could be used to estimate the potential tax ramifications for a given parcel with a certified tax rate.

Secondly, I have taken the steps to notify the property owners of the tentative value both in the mail and on the web site to give them ample opportunity to participate in this process. The tax estimator has been highly successful but there is a caution.

During this Informal Review period, the tentative values cannot be used with the tax estimator because the 2005 tax rate has not yet been established. The web site carries this caution adjacent to the estimator. The tax rates currently on the website are the 2004 rates which will be reduced as a result of the reappraisal we are currently conducting. Thanks to House Bill 920 passed in 1976, the effective tax rates for all voted operating levies will be reduced to offset the value increases due to reappraisals. Therefore, if the 2004 rates were used with the 2005 tentative values then the estimated taxes will be too high! New levies passed this year will be added to the tax rate and raise dependentant upon what the voters approve.

Additionally, HB 66, the State of Ohio's biennium budget bill signed into law in June eliminates the 10% property tax reduction on commercial and industrial properties, as well as some agricultural parcels beginning in Tax Year 2005. The tax estimates currently on the website for commercial and industrial properties are based on 2004 calculations, and therefore the elimination of the 10% tax reduction is not yet considered in the estimator.

The tax estimator appearing on the site beginning in January 2006 will include the elimination of the 10% reduction on affected properties, the new 2005 tax rates which will have been certified, and subsequently the tax estimator can again be used as before.

True Value. According to the Ohio Administrative Code (OAC) 5703-25-05, "true value" is the "fair market value or current market value of property and is the price at which property should change hands on the open market between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a knowledge of all the relevant facts."

The Ohio Revised Code Sec. 5713.03 directs the County Auditor to determine the "True Value" of each parcel. This language is derived from the Ohio Revised Code and State Constitution dating back over 100 years. The law requires us to readjust the value every three years through the reappraisal or the triennial update to more accurately reflect the true value as defined in the law.

The reappraisal process is a multi-step process and we are nearing its completion. Now that property owners have been notified of their new tentative property values, we can narrow our focus from a countywide basis to individual properties. Over the course of the next few months while the values are tentative, citizens have a unique opportunity to be active participants in a governmental process before a final value determination is made.

I hope that this addresses the primary questions you have at this time. If you have others please contact me and we will be glad to address them.
Thanks, Joe Testa, Franklin County Auditor joe_testa@franklincountyohio.gov

Is Central Ohio "Bubble Proof"?

This was in the Dispatch last week.
(Thanks Jeremiah)

I go on about it all the time since I'm often asked about the perceived real estate bubble. Others hear warnings like I heard this morning on the radio -- the price of a Manhattan property has gone done 30% in the last month -- and then they think we must be next here in Central Ohio.

Here is the sum-it-up-quote -- the Columbus housing market would experience an overall price decrease of 5 percent only if mortgage rates rose to more than 17 percent and if 41,000 jobs were lost.

Home depreciation is not in our future.

----
Report: No Threat of a Housing Bubble Seen for Central Ohio
2005-09-28
The Columbus Dispatch, Ohio

By Mike Pramik, --Thanks to the low price of homes and a relatively steady economy, there's no immediate threat of a housing bubble in central Ohio, an industry report states. "You can't have a bubble if you don't have an inflation,'' said Walter Molony, with the National Association of Realtors. The group released a report to its members this week that downplayed the possibility of home prices crashing in central Ohio. It stated that the Columbus housing market would experience an overall price decrease of 5 percent only if mortgage rates rose to more than 17 percent and if 41,000 jobs were lost. In the industry, a "bubble'' is said to occur when a collection of unreasonable home-price increases don't reflect the true value of the homes.

National rates for 30-year, fixed mortgages were averaging 5.39 percent yesterday, according to Bankrate.com. "We used to pray for 10 percent interest rates,'' said Doug McCloud, president of the Columbus Board of Realtors. The Columbus housing market was robust in August, when homes sales increased 8.9 percent to 2,875. Through the first eight months, sales were ahead of the 2004 pace by 2.2 percent. The national picture was similar. The National Association of Realtors reported that existing-home sales increased in August to a seasonally adjusted annual rate of 7.3 million, the second-highest pace ever. That was up from 6.8 million in August 2004.

"Unless the (Federal Reserve) really starts ratcheting up (interest) rates, I don't visualize a bubble -- not in the Midwest,'' McCloud said. "You don't hear about it in Kansas City, St. Louis or Omaha.'' Among the reasons the national board paints a bright picture for central Ohio: "The median existing-home price, $155,900, is 30 percent below the national average. --The median home price increased by less than 1 percent in 2004 and is up 12 percent the past three years. --Central Ohio's ratio of how much people owe on their homes compared to their median income is below the national average. --Job growth is increasing.

Through August, 3,400 jobs were added in central Ohio in the previous 12 months. --Central Ohio added 54,000 homes in the past five years, but job growth and economic expansion should fill them. "You're a lower-cost metropolitan area to begin with, and you avoid double-digit price increases,'' Molony said. "You have plenty of room to grow, unlike areas on the West Coast or the Northeast, which can go through wide swings'' in pricing.