Beware the Delta!

​On Tuesday, I received nine offers on my "fixer-upper opportunity" in the Clinton neighborhood of Oakland (Where?)

This vibrant area, just blocks to Lake Merritt off lower Park Avenue has enjoyed a resurgence of energy as homes are being snapped up and renovated in quick succession.

Makes sense; these architectural gems offer great light, big lots, great bones and easy access to downtown Oakland and the 580 corridor.

In fact, I've had fewer Sunday Opens this year that have attracted MORE attention than 531 E. 22nd and from where I sit, that's terrific news. As a Realtor, strong interest is exactly what I seek as it typically translates to multiple offers (not always, but usually). It didn't hurt that the listing price started at $625,000, making it very attractive for professional flippers, HGTV converts, and new homeowners alike. (NO summer doldrums here.)

Still, here's the part that can get tricky . . . enthusiastic Buyers can, and often do, s-t-r-e-t-c-h beyond their means to beat out the competition in this highly-dynamic marketplace. In the GRAND scheme of things, that's not necessarily a negative, depending on how long you plan to stay in the house, your risk tolerance, and your ability to dive into the pool of family funds for back-up, but it can be a costly gamble if you are rolling quarters to close escrow.

It's important to remember that even though you may have an excellent lender, have been pre-approved through underwriting, AND have been coached to waive your loan and appraisal contingencies, the banks are only going to lend you the agreed upon ratio of the "appraised" value - not the "market" value! For most borrowers, their loan maxes out at 80% (although I successfully closed escrow earlier this spring where the Buyers were borrowing 95%). If your prospective home should appraise for less than you have offered, there could be a significant difference; aka: the "delta." BEWARE THE DELTA!

"Whatcha talkin' bout Willis?!?"

I mean to say that if you've offered $1,200,000 on a house (because you are competing against eight other offers) but it only appraises at $1,150,000, there's going to be a $50,000 discrepancy that needs to be absorbed by the Buyers. In short, DON'T waive your appraisal contingency if you don't have the funds to back up a potential shortfall AND don't throw an incredibly high offer into the mix if the neighborhood sales don't support it, especially if you haven't the extra cash (trust fund), should you need it.

Admittedly, this advice works against Buyers in our current marketplace where each new sale seemingly sets the bar ever higher, where we are coaching you to write definitively to avoid a multiple counter, and where some Agents, quite honestly, are often setting their listing price far below the prevailing marketplace, creating a false narrative. (It works, but it skews expectations and it makes it more difficult for the Appraisers to justify the large gap between the list and sales price.)

It's also why financial TERMS come heavily into play with overbids and preemptive offers. Good Agents want to see a larger percentage of down on these properties where the values may be on the margins. Bigger down payments allow for far more flexibility than very tight loan-to-value (LTV) ratios, so if you are writing in competition, consider throwing MORE money into the pot if you can. It makes you a much stronger Buyer and you'll be in far better position to comfortably waive the financial conditions if necessary. (BTW, very little of this matters if you plan to stay in the home for the next 10-20 years, but it matters a GREAT DEAL if this is a short-term play.)

Lest you think a short appraisal can only happen for these distressed properties in transitioning neighborhoods, that's not the case. I had a high-end listing earlier this year that received a jaw-dropping preemptive offer that failed to meet its offer price during the appraisal process. In this case the gap wasn't tens, but HUNDREDS OF THOUSANDS of dollars! (Ouch.) The Buyers waived ALL contingencies upfront in an aggressive play for the home, but the bank required an appraisal nonetheless. (Make no mistake, if you are securing a loan to purchase a home, the bank WILL require an appraisal, even if you've contractually released the appraisal contingency.)

What happened then?

It wasn't pretty. Still, we managed to get through a bumpy escrow with everyone relatively intact and an excellent result nonetheless, reinforcing my belief that all things are possible with good intentions, good sense, and coachable Buyers and Sellers!

Hey, few people believe in the dream of homeownership as enthusiastically as I do and in this market, I too, have had to cautiously counsel my own clients to waive appraisal and loan conditions to compete, but I've also had long talks about the risks involved . . . (I've had whole dissertations), and when their reserves are too tight, I've discouraged the practice.

Finally, if you can't afford the risk, don't go there. A home is a lovely, aspirational goal in life, but not worth financial insecurity. Let's try and keep this in perspective. There will be other homes; there will be other markets; there will be other opportunities. I promise.

How can I help you?