I missed something big in my blog yesterday.
I was discussing potential “good news” events with respect to rates, and I missed what would be the biggest piece of good news of all: The Iran war ending.
The war has pushed rates up over 3/4%, as I have mentioned, and rates climbed again today largely because of increased tensions. When the war ends, rates won’t immediately fall back to pre-war levels, but I would not be surprised to see a 1/2% drop over the course of a few weeks.
Borrowers with an appraisal waiver sometimes ask if we can order an appraisal anyway.
They do so for any one of the following reasons: (1) They want to make sure they are not overpaying; (2) They think they got a smokin’ deal and they want an appraiser to confirm it; or (3) they want a low appraisal, so they can negotiate for a lower price.
But – ordering an appraisal when there is a waiver is a really bad idea. I will explain why below.
Sidebar: About 25% of Fannie/Freddie (conforming) mortgages get appraisal waivers. That is way down from 2021 when almost 50% of transactions got waivers. FHA, VA, Jumbo, and Non-QM loans never qualify for appraisal waivers.
Why It’s A Bad Idea To Order An Appraisal:
1. As soon as a lender orders an appraisal, the appraisal waiver is invalidated. Lenders are technically required to disclose appraisals ordered in relation to a transaction. The only way for borrowers to obtain an appraisal without losing an appraisal waiver is to order one themselves – without the lender knowing about it.
2. Appraisers correlate to contract price. This is a very important takeaway from this blog, as buyers getting “good deals” are often disappointed when appraisers appraise for contract price. Appraisers do this because (1) the contract price is often one of the best indications of market value; and (2) if they appraise for significantly over contract price, underwriters will sometimes ask if there are hidden condition issues and even request inspection reports.
3. Hoping for a low appraisal is risky for obvious reasons. (1) Sellers may not be willing to come down in price even in what appear to be “soft markets.” We have seen hundreds of transactions blow up in these situations; and (2) if a seller will not come down in price and the existence of the appraisal becomes “known” by the lender or Fannie/Freddie (via an appraisal database that appraisals get uploaded into), the buyer will have to come up with extra cash to cover the shortfall.
4. Appraised value is not market value. This is the biggie and something I blog about all the time. Buyers, sellers, and agents often mistakenly believe that appraisals reflect the market value. And they do to some extent, as appraisers are required to prove that recent sales in the subject’s “market area of influence” support the contract price.
But the negotiations for those “recent sales” date back several months, so they often do not reflect “current” market values – particularly in a dynamic market.
The best indication of current market value is what buyers are willing to pay at any given moment in a free and open market.
Hence, if there are 12 offers over $1 million when there is not a single comparable sale over $850,000, every economist on the planet will tell you that the market value is at least $1 million.
This is a situation we have seen hundreds of times over the year too – and are seeing now in markets flooded with AI cash.
This is why lenders used to allow appraisers to use offers on a property to support value. Lenders stopped allowing it, though, because people figured out they could prop up values with fake offers.
