Jun. 8, 2006 - How do I Know If I Am Overpaying For The House?

This one's for GaryP over at Tri-City Real Estate News.

Gary, to understand the benefit of using a zero down, stacked cost loan to help safeguard you with regard to overpaying for a property, you need to get rid of some common mis-conceptions.

Most people think appraisers know what a property is "worth".  There really is no such thing as a "true value to the penny of what a property is worth".  Heck, we agents change the value of what a property is "worth" everytime we sell 3 houses collectively, as appraisers think a house is "worth" what the last three sold for.  So if we over sold the last three, that value the appraiser is using is inflated, because he is using those last three sales to determine value.

Most people want to know what "it appraised for", AS IF  that means something to THEM.  Even though the buyer pays for the appraisal, the appraiser is not valuing the property for the benefit of the buyer.  The appraiser is valuing the property for the benefit of the LENDER ONLY!

So, it is only common sense, that if you put 50% down and the lender is only "on the hook" for 50% of value, the accuracy of that value is not all that important.  Even if the appraiser is off by 10%, it won't affect the lender.  So the appraiser should not waste a lot of time on that appraisal, fine tuning it to the Nth degree, as it is somewhat irrelevant how accurate it is.  A quick "drive by, wham-bam-thank you m'am" appraisal is good enough for that purpose.

So when DOES the appraiser have to be MOST ACCURATE?  Again, common sense, whenever the lender's risk is the highest.  And when is the lender's risk the highest?  When you have no money down and the closing costs are included in the sale price.  So you can make your offer with 50% down, so the seller' will accept your offer IF AND ONLY IF YOU ARE PREPARED TO DO THAT IF NEEDED!  You can't lie and say that in the contract, if you don't HAVE 50% to put down,  if the lender would require that.  (Some people get that part wrong.  But that's another story for another day.)

So if you apply for your loan with zero down and the closing costs as part of the loan, the appraiser has to be really, really sure of his value when doing the appraisal.  That is because if the lender had to foreclose, the lender would need to sell the property at more than the price you are paying, to get his money back.  The appraiser protects the LENDER, not the BUYER.

So let's say you pay $350,000 and have $10,000 worth of closing costs and are applying for a loan of $360,000.  If it appraises at $350,000 or better, you know it is worth what you are paying, and then you "change your loan program" before docs are drawn, to your original 50% down intention.

Hope that makes sense.  Ask questions over here Gary, if you have them, because I don't visit your blog as often as I do mine .  And lately, not as often as I write at Rain City Guide.  I have to balance that better :-)  

Jun. 8, 2006 - re: How do I Know If I Am Overpaying For The House?