I’ve recently had two excellent escrows bomb because the appraisals came in lower than the offered price – and for two different reasons. A lower appraisal means that if the buyer can’t come up with the difference in cash between the appraised value and the offered value, the deal bombs, much to the dismay and discouragement of all parties.

A common factor for the entry level market is many of the homes being bought and sold have been distressed foreclosure homes that investors have bought for cash, fixed up and “flipped” for $100,000 more several months later. These flipped properties skew the sold comparables for appraisers. In looking for sold comps within the last 4 – 6 months, the appraiser will often see that the home has sold twice – once at the foreclosure auction for cash, and later fixed up and sold for $100k more. Consequently, the higher priced,  flipped homes don’t appraise for the neighborhood of dated, original homes with the much lower price point.

So one of my deals bombed because the property was a “flip”. The investor paid $242k for the REO (bank owned), put about $50k in renovations, then marketed the property at $379k. The appraisal came in at $320k. This is very common in today’s market for entry level homes. There are, in many ways, two market levels today – one level is the price investors pay (all cash!) for their acquisitions and the second level is the price home owners pay. It makes it tough for appraisers to figure out what a property is “worth”.

My second deal bombed because the appraiser was from out of the area, used comparable sales from the investor acquisition side (not the home buyer side) and one comp was used from another condo complex that has a failing HOA and was an inappropriate comp for this deal.

It used to be, if you had a “breath on a mirror” – you could get a loan. Consequently, we’ve gotten ourselves into the mess we’re in, but now the pendulum has swung the other way. As a result of new regulations in the industry, lenders are “skittish”, appraisals are tough, and a deal can bomb at the eleventh hour from the smallest hiccup!