Someone much wiser than I once told me that there are always three sides to a story: Party A’s side, Party B’s side, and the truth. In the mortgage/real estate world, that’s especially poignant.
On a recent transaction, the real estate agent representing the sellers was eager to get the appraisal ordered –we had a short escrow, and she wanted to make sure there were no delays. I don’t blame her at all, as it’s her job to keep the sellers’ interests at the top of her priority list. When I conferred with the buyers’ agent, I learned that the inspection had JUST been completed, and he and his clients had just sent over their response for what they wanted to see repaired.
I reminded the buyers’ agent that, while I didn’t wish to delay the transaction either, we needed to be mindful of certain aspects of the appraisal process. In this instance, if the appraiser went out and did her/his job before the repairs were completed, there’s a strong possibility the buyers would have to pay an additional $150-250. Why? If the appraiser included mention (and photos) of these unrepaired items in her/his report, the underwriter would require the appraiser to go back out to the property to confirm that the repairs had been completed. The underwriter is not going to accept a note and a pinky promise from anyone else that this has been done –only the appraiser can confirm this. And if this were to be required, the appraiser would charge a return-trip fee, and the buyers would be the one paying that fee.
We explained all of this to the buyers so they could decide with their agent how they wanted to proceed –all agreed to have the other agent stress to her sellers that these repairs needed to be made quickly (and correctly, of course) so the appraisal could be ordered in a timely fashion. As an aside, one of the repair items was exposed wires in an exterior sprinkler box (the timer most likely), and one of the buyers laughed and said it could probably be “fixed” by closing the box before the appraiser showed up. No argument there, but I wouldn’t want the buyers to have to pay $150-250 because someone forgot to close that box. The buyers agreed with me. And herein lies the dilemma:
Party A’s side (sellers): we’re busy professionals, and we’ll get to the repairs when we can, but we don’t want the transaction being held up. We’ve given you concessions, so work with us.
Party B’s side (buyers): we met your asking price on the house, so all we’re asking is that you get these items repaired quickly. We’re going to need that extra $150-250 for “house stuff”.
The truth: the underwriter isn’t going to fund this transaction until all the repairs are made and nothing appears on the appraisal that would adversely affect the “lendability” (I’m pretty sure there’s a better word for that) of the home.
In all of this, my job is to spread my arms wide and keep everyone (including the underwriter) moving in the right direction –it’s often like herding cats. Regardless of how we get there, as long as everything closes on time, I’ll take my scratches –I can always make up a really cool story about how I got them.
Some time ago, in a science class I was required to take, I learned something that I actually remembered. Here in the United States, manufacturers of food and other consumer products are required to list the ingredients in the order of their quantity in said substance, largest to smallest – and that’s the reason that when you look at the ingredient list of a lot of products you see “water” listed first. And on those items that enter the health-and-wellness category like shampoo, you’ll see another listing on that back label that reads “Active Ingredient”. In essence, even if the item is, say, 90% water, the active ingredient is the thing that makes the product do what it says it does. For example, the active ingredient in Head & Shoulders shampoo is Pyrithione Zinc, and its job is to control and eliminate dandruff. Here’s another way to look at it: if H&S had ALL the other ingredients EXCEPT Pyrithione Zinc, it would probably clean your hair, but the shampoo would be ineffective as a dandruff fighter. (Dandruff Fighter: good name for an ‘80s cover band.)
In a mortgage, the active ingredient is the appraisal. You could have ALL the other “ingredients” in a mortgage ranging from financial verification and assets to proper debt-to-income ratio and dead-on LTV, but without the appraisal you wouldn’t have a benchmark – no benchmark, no loan, no sale/purchase.
This little exercise bears some attention for both the veteran agents and people who are buying or selling a home for the first time. When an appraiser comes out to do her/his job, they classify the condition of the home with one of six grades, and this factors into the overall value they apply to the home – yes, I know many of you already know that, but let the others catch up. From the Uniform Appraisal Dataset on Condition Ratings and Definitions, I give you the six grades with my English version of each definition:
C1: Brand new – no one has lived in this house
C2: Full remodel – virtually all building components are new or have been recently repaired or rehabilitated
C3: Partial remodel – improvements are well maintained and feature limited physical depreciation due to normal wear and tear
C4: Never been touched – some minor deferred maintenance/physical deterioration due to normal wear and tear
C5: Breaking – obvious deferred maintenance and in need of some significant repairs
C6: Broken – substantial damage/defects that affect the safety, soundness, or structural integrity
Now, think of these grades as the concentration of the active ingredient: C1 and C2 are going to be at full strength, while C5 and C6 are going to dilute significantly the effectiveness of the active ingredient, the appraisal. As I said earlier, everything hinges on the appraisal. If you’re an agent getting ready for a listing appointment, take those six definitions with you and bust them out when you start talking about the price point at which the home should be listed. This will give you more credibility when you tactfully point out that, yes, the neighbor’s home did list and sell for $350,000, but they had fully remodeled bathrooms and new windows – your potential client’s home has the original pink bathtub from 1968 and a window that’s using a plywood sheet instead of a pane of glass. (That’s a LITTLE extreme, I know, but you get the point.) Potential buyers and their agents, when armed with the same information, are going to be better prepared to make offers – the door swings both ways.
Of course, in a mortgage, the biggest ingredient is money – it’s the “water” of the formula, but it’s not going anywhere without the proper amount of the active ingredient (just like many single guys on a Friday evening if they don’t use enough Head & Shoulders during the week).