Pawling Public Radio:This Side of the Law: What is Your Home “Worth”?
By: Brian L. Berlandi
Partner – Berlandi Nussbaum & Retizas LLP
We all know the saying….”Your home is only worth what a buyer will pay for it.” That is ever-so-true in today’s market, where buyers appear to have more leverage than sellers. Those of us who bought homes 5-6 years ago, before the real estate bubble popped, now find ourselves struggling just to sell the same home at a 20-30% discount off our original purchase price. Buyers are being picky and negotiating hard for the prices they want to pay, and banks are employing far more stringent criteria on lending, making it harder and harder for buyers to even get loans.
Even when a buyer is otherwise qualified for a loan (i.e. has a good credit score, stable income, etc.), we are still seeing banks not approve the loan because the home to be purchased does not appraise high enough to meet the necessary loan-to-value ratio. Take a simple example that we see often at BNR:
- Mr. and Mrs. Sellers want to sell their home in Dutchess County, which they purchased in 2005 for $400,000. They put it on the market with a real estate broker, listing it at $400,000.
- 18 months go by with no offers, and the Sellers reduce the price 2 or 3 times such that it’s currently listed at $340,000.
- Finally, Mr. and Mrs. Buyers come along.
- The Buyers love the home and very much want to buy it, but not for any price near $340,000.
- The Sellers are very eager to sell (because they already have their eye on a new condo in South Carolina), and after a lengthy negotiation, the parties agree on a $250,000 sales price and sign a Contract for Sale.
- The Buyers then work with a mortgage broker who submits their loan application to XYZ Bank based out of Plano, Texas.
- XYZ Bank agrees to make a loan the Buyers on an 80% loan-to-value ratio (or 80% LTV), meaning that, assuming the value of the house is $250,000, XYZ Bank will loan the Buyers 80% of the value (i.e. $200,000). The remaining 20% (i.e. $50,000) will have to be paid by the Buyers out-of-pocket.
- As part of underwriting the loan, XYZ Bank then sends Mr. Real Estate Appraiser from Long Island to the property to appraise the value of the home and to ensure that it does, in fact, have a value of $250,000.
- Mr. Appraiser has never heard of Dutchess County before, never mind been here. He has no knowledge of the local market, nor of the appropriate and relevant comparable sales in the neighborhood against which to compare the Sellers home.
- Nonetheless, he plugs Dutchess County into his GPS, finds the home, does his walk-around, gets back in his car, and heads back to Long Island.
- The next day, he provides a report to XYZ Bank that states, based on his opinion, the Sellers home has a value of only $235,000.
- The Buyers then call the Sellers and tell them they have to lower the price (again) because the house is not “worth” $250,000, it’s only “worth” $235,000.
- The Sellers have a fit and say “no way”.
- The deal dies, and the Sellers are faced with the decision of either putting the home back on the market, or giving up and just staying put in the home (i.e. South Carolina will have to wait…..)
This scenario has become oh-so-typical. In the end, both parties are disappointed. The Sellers haven’t sold the home they want/need to sell, and the Buyers have not purchased the home they fell in love with.
In the end, it all came down to what the house was “worth.”
So what could have been done differently to create a better outcome? Here are a few tips to consider…
- If you are the Sellers, consider hiring a good, local real estate broker who really knows your market well and will price your home appropriately. While you may certainly suffer from the disappointment of selling your home for less than what you purchased it for, a good real estate broker will keep your expectations in line.
- If you are the Buyers, consider working with a local bank (and we have many in Dutchess County) who knows the market well and knows what homes in this area are “worth”. If you elect to use a large, national banking institution, at least consider using one that regularly makes loans to home buyers in this market (and there are a few of them out there too). Choosing XYZ Bank in Plano, Texas can be a recipe for disaster.
- Lastly, whether you are the Sellers or the Buyers, insist that the Buyers bank utilize an appraiser who knows the market well, who has done many appraisals in your local area, and who can competently assess what your home is “worth” by examining the appropriate and relevant comparable sales in the neighborhood.