Last week I played doctor. This week it’s forensic pathologist. Admittedly, I’m not very good at either one. I let a real estate deal flat line and the cause of death remains unclear. Fortunately, there is a lot that can be learned when you dissect a paper corpse. The writers of CSI could have never dreamed up an episode this good. Come to think of it this story is actually more like a dark comedy than a murder mystery.
It started out like any other normal real estate transaction. Actually, it didn’t. But isn’t that how you begin any good script? The subject property is not a short sale or REO, but owned free and clear by my real estate partner and client. The subject property description: new carpet, paint, appliances, pool, blinds, ceiling fans, etc. Is this starting to sound like a police report yet? The home goes under contract in 6 days to VA qualified buyers, a very nice family currently renting in the area. The plot up to this point seems fairly predictable. The nice family buys the home of their dreams and lives happily ever after. Except that this is not happily ever after, this is Buckeye, Arizona where real estate market values have plummeted by more than 50%.
Of course, the trouble begins with the appraisal. Every good story needs a villain and in today’s struggling real estate market the lender fits the bill perfectly (deservedly so). And what made-for-TV villain would operate without a trusty accomplice, in this case the appraisal process? So the contract price is $135,000. However, the appraisal comes back at $125,000. This is not an insurmountable price difference by any means. Luckily, my client is a dealmaker, not a deal breaker so he lowers his price to $127,000 and the buyer agrees to bring an additional $2,000 to help make up the difference. Problem solved.
Suddenly the bad guys don’t seem so bad. My client and I conclude the lender hired a competent, local appraiser that applied some common sense to the process. He carefully reviewed the subject property and three other comparable homes using similar criteria but the appraisal came in a little low. It happens. Of course my client is disappointed about it but the margins on this deal are still very good. So is it time for the nice family to ride off into the sunset? Not so fast. Enter the next evil doer, Mr. Desk Review Appraisal. This is starting to feel like a Batman and Robin movie…too many villains. And Mr. Desk Review Appraisal plays the part of the Joker. Here are a few lines from the script, I mean the review appraisal:
It starts out on page 3 admitting that “no physical inspection of the property has been made.” The madness continues on page 6 with the line, “Reviewer’s recommendation of value is based on this limited data and a complete appraisal should be completed on the subject if significant variances in value or descriptions of the subject physical characteristics are noted in this report.” And here’s the Joker’s punch line, “Reviewer’s recommendation: $93,000.” This is followed by the parting shot, “Overall, the original appraisal report seems to be accurate and provides a fair estimate of value for the subject property.”
Huh? Never mind that the desk review appraiser is not licensed in the state of Arizona. Forget about the fact that the subject property or the comparables he used were never inspected, or that he works 360 miles away in Sherman Oaks, California and has no geographic competence. The lender used this desk review to trump the original appraisal and will only underwrite the loan based on the $93,000 value in the report, thus killing the deal.
The autopsy results conclude that the lender did not really want to loan this family any money. A mortgage lender friend of mine pointed out there was probably something in the file the underwriter did not like. This desk review just gave the lender an excuse to bail out. Case closed.