What Are the Implications When a Buyer Waives Appraisal in a Bidding War?

Real_Estate_Today_bylineWhen a home is priced at or below its likely selling price based on recent sales of comparable homes, there’s a good chance in this seller’s market that multiple offers could bid it up, possibly above the value an appraiser might give it. So what happens then?

Fortunately, I can report that the homes I have sold above the value suggested by comparable sales have not, as a rule, had trouble appraising for the contract price. Showing the appraiser the multiple offers that were received can demonstrate real-world market value. Without seeing those competing offers, the appraiser might determine that the buyer paid more than they should have. The presence of multiple, nearly equal offers gives appraisers an important tool for justifying value in our rising market.

Whenever a purchase is financed by a lender, there will be an appraisal. Lenders require them to make sure they’re not lending based on an overstated valuation. That doesn’t mean that the buyer can’t waive appraisal objection and bring additional funds to cover the discrepancy between appraised value and contract price. The contract may or may not specify a limit to the size of discrepancy the buyer will cover. Regardless, it is important for the seller’s agent to ascertain that the buyer is able to bring that additional cash to the closing table.

If the buyer is borrowing 95% or more of the purchase price, one might ask whether bringing several thousand extra dollars to the closing table is possible. This is where it is advisable for the listing agent to interview the buyer’s lender — something we do regardless of the size of the down payment. Typically, a buyer who is putting down 20% or more of the purchase price is more likely to have available cash to cover an appraisal discrepancy.

With Golden Real Estate’s auction approach, which maximizes the purchase price for our sellers, it is not unusual for the final price to be well above what comparable sales might support.  And because one can never be certain that the appraiser will be impressed enough by the existence of those other competing offers to justify the contract price, it’s a good idea to ask that buyers cover some or all of any appraisal discrepancy and that they provide evidence of their ability to bring extra funds to closing for that purpose.

Few buyers start out offering to waive appraisal, but once the bidding enters a range that is considerably above an appraisal based solely on recent sales of comparable homes, the listing agent can and should encourage waiving of the appraisal objection by the highest bidders.

One should remember, however, that an offer to waive appraisal objection is not iron clad when a lender is involved, because the buyer can still terminate based on loan objection if the appraisal ordered by the lender comes in too low for the buyer’s comfort. I’ve witnessed the scenario where a buyer who has agreed to waive appraisal objection still threatens to terminate because of the low appraisal, at which point the seller offers to lower the price to keep the contract from falling (assuming he doesn’t have a backup contract).

This is not unlike when a buyer agrees to purchase a home “as is” and use the inspection deadline only to terminate, not to demand any repairs. That can be a hollow promise.  If, for example, the buyer decides to terminate because the furnace needs to be replaced, the seller is likely to say, “Wait! I’ll replace the furnace!” Why?  Because the seller now knows the furnace needs to be replaced and would have to disclose that fact to the next buyer. Indeed, when I’m representing a buyer in what appears to be a bidding war, I will suggest making our offer “as is” while advising the buyer that it doesn’t mean we can’t get serious items repaired. The only time this doesn’t work is when the seller has received a backup contract that’s more attractive than ours. I point out to my buyer that the seller might be happy to have him or her terminate so that back-up offer can become the primary contract.

These two areas — appraisal and inspection — require deft skill in order to navigate the negotiation process effectively — a good reason to employ an experienced listing agent like one of us at Golden Real Estate instead of trying the for-sale-by-owner (FSBO) approach. A good listing broker can definitely justify his or her commission both in getting a higher selling price and saving money through effective negotiation.

 

Property Taxes in 2019 Will Be Based on the Value of Your Home This Saturday

Real_Estate_Today_bylineColorado’s constitution mandates that every county assessor base the assessment of real estate taxes on the full market valuation of each parcel as of June 30th of every even-numbered year. Next May, the assessor will mail out an estimated value as of this Saturday to each parcel owner, giving until June 1st to challenge the assessor’s valuation.

If you are wondering how much your property taxes might go up for the next 2-year cycle, you need only compare what your home might have sold for on June 30, 2016, with what it could sell for now, based on the sale of comparable homes.

Although June MLS statistics aren’t complete yet, let’s compare current sales statistics with those from June 2016. (Remember: Not all sales are on the MLS.)

Statistics for Denver:

Using REcolorado (Denver’s MLS) as my source, the average price per total square foot (PSF) of condos and townhomes in the City & County of Denver rose from $279 in June 2016 to $320 this month. That is a 14.7% increase in value, which is surprising, given that the median sold price during that same timeframe increased from $277,250 to $380,500, a 37.2% increase.

During that same period the average price per total square foot of detached single family homes rose from $231 to $271, a 17.3% increase, although the median sold price increased by 20% (from $405,000 to $486,200).

These calculations are for Denver as a whole. There will, of course, be greater or lesser valuation changes in different Denver neighborhoods.  Here are some examples, based on price per total square foot:

Green Valley Ranch – 10.7%

Northeast Denver – 14.9%

Cherry Creek, Hilltop, Montclair – 15.4%

Southeast Denver (Alameda to Evans) – 10.5%

Southeast Denver (south of Evans) – 10.7%

Downtown Denver (to Platte River) – 19.8%

Northwest Denver (Sloans Lake, Highland, Berkeley, Sunnyside) – 18.4%

Golden Triangle  – 9.6%

West Denver (Colfax to 6th Ave. only) – 24.9%

West Denver (6th Ave. to Alameda) – 14.9%

Southwest Denver (Alameda to Jewell) – 24.4%

Southwest Denver (south of Jewell Ave.) – 24.4%

Valuations also can vary based on style. For example, across Denver ranch style (1 story) homes saw an increase in price per total square foot of 19.3%, whereas non-ranch style homes saw an average increase of 13.8%. 

The age of the home can also make a difference. Single family detached homes built before 1990 saw their average PSF values increase by 16.2%, whereas homes built in 1990 or later increased by 11.5%. 

Statistics for Jefferson County:

Using REcolorado (Denver’s MLS) as my source, the average price per total square foot of condos and townhomes in Jefferson County rose from $188 in June 2016 to $232 this month. That is a 23.4% increase in value. Condos increased their value by 21%, and townhomes increased their value by 26.4%.

During that same period the average price per total square foot of detached single family homes rose from $175 to $211, a 20.6% increase.  

These calculations are for Jefferson County as a whole. There will, of course, be greater or lesser valuation changes in every city and in every subdivision.

Here are the increases broken down by city addresses (which can include unincorporated areas):

Arvada – 20.9%

Lakewood – 21.4%

Golden addresses  – 8.8%

Littleton addresses – 13.6%

Wheat Ridge – 24.3%

Evergreen addresses – 10.2%

Smaller cities such as Lakeside and Edgewater did not have a enough sales to produce statistically valid percentages.

Valuations also can vary based on style. For example, ranch style (1 story) homes in Jeffco saw an increase in price per total square foot of 20.7%, whereas 2-story homes saw an increase of 17.3%. 

The age of the home can also make a difference. Single family detached homes built before 1990 saw their average PSF values increase by 18.8%, whereas homes built in 1990 or later increased by 12.7%. 

Conclusion:

All these variations point to only one conclusion — that you need to use the tools provided on the Denver and Jeffco assessors’ web pages (which I’ll explain in a May 2019 column) to determine whether the assessor has valued your home correctly. Last May I challenged the increase on my own home, and, by using the eligible comps listed on the assessor’s website, I received a reduction of nearly $150,000.

Lastly, let me share how the Gallagher Amendment to the state constitution serves to reduce the impact of increased valuations on residential property tax bills.

That amendment fixes the assessment ratio for non-residential property at 29% of the full valuation. For example, if a commercial property has a full valuation of $1 million, the assessed value against which the mill levy is applied is 29% of that amount, or $290,000.  Because that assessment ratio remains fixed at 29%, and because the amendment requires that non-residential property taxes equal 55% of the total property tax revenue statewide, the ratio applied to residential properties keeps dropping from 21% when the Gallagher Amendment took effect in 1982.  Last year, that ratio dropped to 7.2%,  and it is projected to drop to 6.11% next year.  The end result could actually be a reduced assessed valuation even in the face of an increased full valuation.

Let’s say your home was worth $400,000 in 2016, with an assessed value of $28,800 (7.2%). Now your home is worth $500,000, a 25% increase, but if the assessment ratio is reduced to 6.11% as expected, the mill levy will now be applied to an assessed value of $30,550 — an increase of less than 6.1%.  Thus, if the mill levy remains unchanged, your property taxes will increase by only 6.1%, even though your home’s value (as determined by the assessor) increased by 25%.

Moreover, mill levies from many of the different taxing districts keep declining as a result of the Taxpayer Bill of Rights (TABOR) provision of the constitution, so your actual property tax increase in the above example could well be less than 5%.

 

 

Last Week’s “Personal” Column Touched a Nerve

When I took the unusual step of devoting last week’s column to politics, my broker associates and I had little idea what the response from readers would be.  What blowback would we get?

It’s unusual to get one or two emails or calls from readers about a column, but last week I received over 60 emails and many calls that were positive, and only 3 emails (no calls, 1 letter) of a negative nature. There were so many emails that I created a separate folder in Outlook to save them. Common themes were to thank me for my comments and for my “courage” in risking the loss of business for my brokerage, and many of the writers said they would use Golden Real Estate because they were so pleased that I spoke out. Four people came to my office on Friday to thank me in person. One came on Monday to set a listing appointment.

Several readers, including Rep. Ed Perlmutter, liked my suggestion that the Democratic leadership create a “Shadow Cabinet” to monitor the actions and pronouncements of Trump’s cabinet members.

This level of response was all the more remarkable since, by eliminating all branding in the ad, no phone number, email address, website or other contact info appeared with the column.

My blog post of that column has additional content. It’s at www.JimSmith145.blogspot.com.

 

Enjoy the Savings of Solar Power in This Arvada Home

DSC_0346Not visible from the street is this home’s solar system, which meets most of this home’s electrical needs for only $137/month year-round. It is located at 5674 Fig Way in the Candlelight Valley subdivision adjacent to the Van Bibber open space park.  A trailhead is just two blocks away. It’s a super quiet location, as you can tell by watching the narrated video tour at www.JeffcoSolarHomes.com. This home has a finished walk-out basement and has one of the larger lots — over 1/3 acre. Everything about this home is top shelf, including the gourmet kitchen with marble floor, granite countertops and built-in refrigerator. The walk-out basement is a mother-in-law apartment with its own kitchen. The expansive deck and covered patio provide additional entertainment possibilities.  Listed at $797,000. 

Open Saturday, June 30th, 1-4 pm.

 

Price Reduced on Solar-Powered Arvada Ranch With Mother-in-Law Apartment

DSC_0346Not visible from the street is this home’s solar system, which meets most of this home’s electrical needs for only $137/month year-round. It is located at 5674 Fig Way in the Candlelight Valley subdivision adjacent to the Van Bibber open space park.  A trailhead is just two blocks away. It’s a super quiet location, as you can tell by watching (and listening to) the narrated video tour at www.CandlelightValleyHome.info. This  home has a finished walk-out basement and is on one of the larger lots — over 1/3 acre. Everything about this home is top shelf, including the gourmet kitchen with marble floor, granite countertops and GE Monogram refrigerator. The walk-out basement is a mother-in-law apartment with its own kitchen. The expansive deck and covered patio provide additional entertainment possibilities.  Now listed at $797,000.

 

Just in Time: A Breakthrough in ‘Rent-to-Own’ for Those Who Can’t Buy Now

Real_Estate_Today_byline      It’s not uncommon for us to get a phone call or drop-in from someone who would like to buy but who might not be in a position do so at this time. They are looking for a rental, and for that we refer them to trusted companies that specialize in rentals. Sometimes the caller or visitor will inquire about rent-to-own, but we explain that it is nearly impossible to find a seller in this market who would consider rent-to-own when they can sell now for top dollar.

I’m happy to announce a breakthrough. Last week our office was presented with a new business model that could fill this gap in the real estate market. The way it works is this: we submit the prospect’s name to a company which, upon approving the person as a tenant, agrees to purchase a house, which that pre-approved tenant can rent.

Once approved, the prospect goes on the company’s website which contains all the MLS listings (sub-ject to company approval) that qualify for this program. The homes can range in price from $100,000 to $550,000. Only townhomes and single family homes qualify for this program — condos do not.

If you’ve looked online for rentals, you are familiar with the limited inventory of rental homes.

The fact that the sellers and listing agents of the qualified MLS listings are offering their homes for sale, not for rent, doesn’t matter. If a prospective tenant finds a for-sale home they’d like to rent, our partner company can offer a lease for that home which states what the rent will be for the next five years, and which also provides a pre-determined purchase price for that home over the same 5-year period.

Let’s say you find a $500,000 home you’d like to rent.  If you click on that listing, you’ll find the following grid of rental and purchase prices:

Rent_to_own_grid As you might expect, these figures are subject to adjustment, since (1) the listed price may not be the final sale price, (2) the home may need renovation work, and (3) there may be other costs associated with purchasing and owning the property. These and other conditions are spelled out in the lease agreement that is signed by the prospective tenant.

At that point, we represent the rent-to-own company in negotiating a purchase of the identified property. To the seller and to us as a buyer’s agent, it’s an ordinary transaction by an investor.   In this case, however, the investor has already identified a qualified tenant for the property.

Although the landlord is bound by the specified rents and purchase prices for five years, the tenant is only locked into a one-year renewable lease and can choose to purchase the home at any time.  They can also choose to not renew the lease and simply walk away.

This flexibility will be particularly attractive, I expect, to people relocating to our area who may be able to buy immediately, but don’t want to lock themselves into purchasing the first home they find. They can rent a home they think they might want to buy, then buy another house after the first 1-year lease period is up.  They can also opt to exercise their option to buy the house for a pre-determined price — an increase over what their landlord paid for it.

Home_Partners_screen_shot  At right is how an MLS listing appears when displayed on the company’s website, showing the listing price on the right and the estimated initial rent on the left.

Although the prospective tenant is not our client — the landlord is — we set up showings for that tenant just like we would for any buyer. When the tenant identifies the home they’re interested in, we tell the company and together we go about buying the property so that tenant can rent it.

If you or someone you know can’t (or doesn’t want to) buy at this time, have them call any Golden Real Estate agent at 303-302-3636 or send an email to info@GoldenRealEstate.com.

 

What Is an ‘Escalation Clause’ and How Should Sellers Respond to One?

In our competitive seller’s market where a listing might attract five, ten or more competing offers, submitted contracts often include something called an “escalation clause.”

An escalation clause is an additional provision worded something like this: “In the event Seller receives a competing contract with a purchase price, net of concessions, in excess of the Purchase Price in this Contract, Buyer agrees to increase the Purchase Price of this Contract to $1,000 in excess of the purchase price of said competing contract, up to a maximum of $______.” I have seen contracts offering as much as $5,000 over a competing contract.

Two things you need to know about this strategy. Most importantly, the seller is completely free to ignore the escalation clause and does not even have to accept the best offer. Secondly, when it’s you submitting the contract with an escalation clause, I recommend not inserting a maximum price. That makes it more likely you’ll receive a call from the seller’s agent telling you what that higher offer is.