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Jun 23

Overpriced Listings

Twice this week I ran across buyers that were attempting to purchase properties that were obviously overpriced. Declining property values have been a growing problem for everyone in the industry for the last few years.  Issues with appraisals run neck-and-neck with problems regarding the condition of the properties. 

The reduction in property values created an almost cottage industry called short sales.  Short sales have been around for as long as there have been mortgages but they have never been as main stream as they are today.  Lenders and the real estate industry were not prepared for the magnitude of the problem.  They have been playing catch up from the very beginning.  

A short sale is what happens when the value of the property is less than the balance of the mortgage and the seller asks the lender to accept less than is owed so the property can be sold.   Explaining this to a seller is not an easy task for a Realtor.  The idea that real estate is the best investment because “They don’t make any more of it” is hard wired in to all of us. 

Not all overpriced listings are an attempt to avoid a short sale, in fact most are simply an indication of greed.  The seller just wants more than the property is worth.

The rules for lending are very specific regarding the value of the real estate being pledged for a mortgage.  The lender must use the lower of the sale price or appraised value when computing the loan-to-value for the mortgage.  This doesn’t mean the buyer cannot pay more for the property than it will appraise for, it simply means they cannot use the inflated price for calculating the size of the mortgage.

How Mortgage Amounts Are Calculated

Let’s assume a property priced at $110,000 but will appraise for only $100,000.  On a standard conventional fixed rate mortgage the minimum down payment is 5%.  Okay, that is the flip side of saying the maximum loan amount is 95%.  But the definition is 95% of the sale price or the appraised value whichever is less.  If the property only appraised for $100,000 then the maximum mortgage is $95,000.  The buyer could still purchase the property for $110,000 but the amount needed for down payment would be the difference between that figure and the maximum loan amount which works out to be $15,000.  

If the property had appraised for $110,000 then the required down payment in our example would have been $5,500, a far cry from $15,000.  This is the primary reason most properties that are priced above the market value will not be sold at the inflated price. 

Some Realtors Will Take a Listing at Any Price

Listings are inventory and the more inventory a Realtor has the more inquiries they will receive from buyers.  Some Realtors will list a home at any price while others will not.  It is a numbers game for those who choose to ignore the comparable sales.  If a buyer calls about a Realtor’s overpriced listing the agent may be able to sell them another home that is not overpriced.  Although there is nothing illegal about taking an overpriced listing it doesn’t help the owner of the property or the marketplace only the Realtor taking the listing.  

The seller is hoping for a miracle, somehow their property will sell for a significant amount above what similar properties are selling for.  Even if they are lucky enough to find a buyer that loves the property a problem will occur when the buyer applies for a mortgage.  Okay, the seller hopes a cash buyer will step up that doesn’t need a mortgage.  Possible, but cash buyers think they are special because they are paying all cash and therefore deserve a bargain, not compatible with the seller’s plan.   

What Can a Buyer Do?

This article began because a couple of buyers asked what to do because they found a property they liked but the price was significantly above the market value.  There is actually a fair solution when you receive a counter offer from the seller that is higher than what you believe is the actual value.  Accept the seller’s counter offer provided the seller or the listing Realtor pays the buyer’s lender for the appraisal upfront.  

Oh man!  Can I kick a hornet’s nest or what?  Ask the seller’s Realtor to pay for the buyer’s appraisal?  You must admit that is out of the box thinking.  Leave it up to the selling side, let them decide who is going to pay it, or maybe they split the cost, it doesn’t matter to the buyer.  This little maneuver will at least initiate a serious dialogue between the seller and the listing Realtor about the true value of the property.

I had to toss the listing Realtor into the mix because the problem never would have surfaced in the first place if they had not listed the property for more than it was worth.    

The clause would also indicate that in the event the property does not appraise for the agreed upon price the seller will have the option to lower the price to the appraised value or release the buyer from the contract.  This solution protects both sides; the buyer is not forking out money for the appraisal on an overpriced property yet both parties have the possibility of discovering how much the property will appraise for.  Win, win.   

Please share this article with others if you like out of the box thinking.

 

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