Austin Real Estate Transactions Often Very Difficult

by Steve Crossland, REALTOR in Austin TX on June 8, 2012 · 12 comments

Being a Realtor in Austin, or anywhere, is an interesting and rewarding profession. And often frustrating. It’s a profession where the two most visible components of the job – the screwups and the easy deals – are what the public sees the most. On the back-end though, there is a lot going on that is not visible and sometimes remains unknown to the parties because the agents just take care of it. Still, a lot of deals crater because of problems. Some for good reasons, others that could have been saved with better efforts and more tenacity, but were not because the seller, buyer or the agents involved were not able to find resolution and solve the issues (or emotions).

Thus, real estate transactions in Austin are often much more difficult to complete than most people realize. I’ll use two of my recent buyer closings as examples.

Example 1 - Underwriter Wants a Paystub
Buyer moving to Austin for new job. Solid credit, income, etc. Years of industry experience in the same profession as the new job. We go through pre-approval, get the lender letter, find a house, get it under contract, then find out the lender actually can’t do the loan until the underwriter has the first paystub. A signed employment contract is not good enough,  it turns out. It use to be, so now I know.

I argued this with the lender from every angle I could think of, tried different lenders, but that’s just how tight things have become, even for good, quality buyers. Since the new job wasn’t going to start for several months, and the old job income couldn’t be used because he was leaving, this catch-22 meant buyer had to drop that deal.

So, end result, instead of finding a home to move into prior to the relocation, buyer would have to come to Austin and bunk up with family, start the job, then find a house.

Fast forward 3 months. Buyer starts new job and is bunking with family. We find new house and get it under contract. First paystub is short, because, well, it’s the first paycheck and is for less hours. The lender’s underwriter doesn’t like this. Wants to see a “full” paycheck. Logic and common sense is irrelevant. The deal seems like it could actually crater or have to be postponed. We never like to add time to a deal. Time is our enemy. We want things to close on time, as agreed. Ultimately additional documentation made it pan out but not without a lot of effort.

Underwriters are really, really picky lately. This is hurting the market as underwriting has over-corrected from the boom days when anyone who could fog a mirror and tell a lie could get a loan. Today, well qualified buyers are being thwarted, or run through the ringer. It’s really unfortunate.

Example 2 – Appraisal Comes up Short
You’ve probably heard about “short” appraisals. This is happening more and more in the Austin real estate market as some areas are experiencing steady price increases. Appraisals generally lag the market. On this particular deal, I had the home (my listing) under contract pre-MLS for full list price of $175K. My seller paid $168K in 2008, so $175K in a rising market was the right price, and we all knew it (buyer, seller, agents), thus the contract price.

The FHA appraisal came in at $160K.  Oh brother. At first I thought the other agent was joking when he called to tell me. “Am I being punked? $160? Surely this is a joke”.

It wasn’t a joke. I had the other agent send the sales comps being used by the appraiser, so I could investigate. Sure enough, these dud comps stunk up our deal bigtime, and undervalued the home. Both me and the other agent knew the contract value was good, but we didn’t have any recent comps to prove it. This happens sometimes. There can be “holes” in the recent sales comps, but experienced agents “know” the value of homes in certain areas. The fact that it was snapped up pre-MLS confirms this, but is NOT a fact that an appraiser can use.

So I started looking at the Pending sales to see if there might be some “comps in waiting”, so to speak. There was one which would support our value which had gone Pending 45 days earlier. Surely that one would close soon. Found another one that was 30 days Pending. That one would work also, provided the contract price was close to list.

The other agent contacted the listing agents on both Pending listings. One home had actually already closed and the agent just forgot to  change it to Sold status in the MLS. Done. One down.

The other was closing very soon. The appraiser agreed to hold off on final appraised value and review these new, more recent  comparable sales once the second one closed. Still, after all that, he still only came up with $170K.

This is when a buyer and seller have to decide if they want to make the deal work or not. Buyer gave up some of the closing costs built into the deal. Seller gave up $1,400 in net proceeds, and it was worked out.

It would have been a gamble for the  Seller to try to find a new buyer and a higher appraisal. FHA appraisals stick with a property for 6 months, so he would need a non-FHA buyer in a neighborhood where most sales go FHA. The buyer didn’t want to start from scratch either. So compromising made sense for both buyer and seller.

I was lucky to have an experienced, capable agent on the other side of the deal who was able to walk the careful line of interfacing with the appraiser without seeming to try to “influence” or “puff” an appraisal. This is a delicate task. Remember, puffed up appraisals contributed greatly to the real estate bubble and bust nationwide not that long ago.

Realtors are in fact allowed to talk with appraisers, ask about the comps used, offer additional information about which the appraiser may not be aware, etc. In this case, we had real, verifiable information that the appraiser agreed would change the value if available, and indeed, he wanted the home to be given the proper appraised value. Lucky, again, he wasn’t one of those “Little Napoleon” appraisers who get his chest hairs all standing on end when the appraisal is questioned. Had that been the case, there is still formal appraisal appeal process, but that takes time and more effort.

Both of the above deals, in addition to everything I described, also included the typical other “garden variety” hiccups and inspection issues on top of the bigger problems. But we’re use to those and they usually don’t kill a deal, if everyone is calm and reasonable.

Finally, “luck” is very important, as is patience and tenacity, when trying to salvage a deal that takes a wrong turn. It only take one difficult person, whether the buyer, seller, agent, inspector, appraiser, lender, buyer’s mom, etc., to make resolution even harder to achieve. When everyone works toward the common goal of a successful outcome, and egos and emotions don’t cloud the process, even the toughest deals can be worked through to completion.

What I tell every client, both buyers and sellers, is that “something is going to go wrong, or not as planned with your deal. I don’t know what it is yet, and hopefully it won’t happen at all, but when it happens, we’ll deal with it and get through”.

And that’s usually what happens.

{ 12 comments… read them below or add one }

1 mamacita June 8, 2012 at 9:16 pm

I’m so glad you posted this. We bought our house (in Houston) in December, and ran into the same two problems. Our house was appraised BELOW the county appraisal district value. Even before then our neighbors were getting tear-down offers for 15% over our appraisal value. [Which makes sense, I guess--if regular people can't get financing to buy in the neighborhood, builders with deep pockets can come in and build huge new houses that appraisers are willing to put greater value on. Which will create a bubble of its own...]

The underwriting process was similarly absurd. We’d been renting the house for 8 years already, and the mortgage payment (including escrow) would actually be lower than our rent. My husband has worked at the same corporate job for 12 years, and we had 8-9 times the mortgage payment in his income alone. The underwriters still treated us like we had cooties.

2 Robert Grunnah June 12, 2012 at 5:40 am

Great post, as usual, Steve.

These are definitely two hassles involved in deals these days. I hate the appraisal issue, and I hate when lenders haven’t properly pre-qualified buyers beforehand. Most of the issues related to buyer pre-qualification, in my mind, should be resolved by the lender prior to issuing a pre-qualification letter.

The other big headache with deals is unreasonable expectations from the buyer side with regard to inspection. A less-than-skilled agent will just forward the property inspection to a buyer without any explanation. This usually freaks a first timer out, leading to an unreasonable repair request, followed by an uncomfortable back and forth that all-too-often leads to contract cancellation.

I am twice as pleased to accept a contract from an experienced buyer agent that I know won’t lead a buyer down this path. Unfortunately, at the “low end”, price-wise, it is all too often a new agent that I have to deal with.

3 Steve Crossland, REALTOR in Austin TX June 12, 2012 at 6:39 am

Robert, Agreed on the lender prequal. We actually have very fewer buyers who ultimately don’t qualify, but we do run into a lot of hiccups.

On the inspections, agreed also. I bristle at agents who simply forward the inspection. If you buy a 1982 Buick Skylark, it’s a 1982 Buick Skylark. Same with 1962 ranch style home in South Austin. There will be known and expected deficiencies. The question I ask is whether the issues change the value of the property (i.e. bad slab, sewer line, roof, etc).

Mamacita, thanks for your comment.

Steve

4 atxr June 14, 2012 at 9:01 am

I had similar experience.

Got my loan processed and approved. But right before it is funded, I changed job. Hence everything went down the drain.

5 Chris Adams June 23, 2012 at 7:18 am

Hi Steve,
I wonder, since the hiccup in your deal was the appraiser, would it not have been more effective to absorb the cost and invite a different appraiser?

6 Steve Crossland, REALTOR in Austin TX June 26, 2012 at 10:04 am

Hi Chris,

The lender assigns the appraiser. Agents have no control over which appraiser is used. It has to remain arm’s length.

Steve

7 vri July 2, 2012 at 1:03 pm

I too ran into a picky underwriter who wanted nt-picky documentation. Although it frustrated me initially, I realized that they are the last line of defense against the real estate gaming and unregulated free-for-all that brought down the economy 4 years ago. My experienced loan agent was invaluable in bridging the divide between what I had and what the underwriter needed.

8 Theresa July 17, 2012 at 4:20 pm

Steve,
Here is my question: if the appraisal comes short and seller not willing to lower the price and buyer is not able to come up with the difference, could the buyer walk away without forfeiting the earnest money? Assuming the appraisal report came in after the option period and the finance contingency period.

Thanks,
Theresa

9 Jason Grote July 21, 2012 at 8:22 pm

Great blog article… We recently sold an investment property where the appraisal came in $25k under… After debating whether to cut that deal loose and try to find another buyer and hope that they get a more “optimistic” appraiser, we sold it at appraised value…. ouch! The buyer’s were willing to pay $25k more. Isn’t that what should direct home values and not appraisers?

10 Colleen July 27, 2012 at 11:53 am

This is a great post! So many don’t quite understand the very long process of actually getting a home and how difficult it can be. This is such a great resource for anyone! Thanks Crossland Team!

11 Steve Crossland, REALTOR in Austin TX July 29, 2012 at 5:54 pm

vri: yes, good lenders are invaluable.

Theresa: Yes, if the property does not meet the banks underwriting guidelines, then most standard contracts address that, allowing the buyer to terminate and receive a refund of the earnest money.

Jason: I did the same thing with a duplex I owned in 2002. Sold it for $8K less than contract price because the appraisal came up short. It’s always a tough spot to be put into.

Colleen: Thanks!

Steve

12 Foreclosure Data Bank July 30, 2012 at 10:58 pm

This is a fantastic post! So many do not quite comprehend the very lengthy procedure of actually getting a house and how challenging it can be. This is such an excellent source for anyone! Thanks for this great information

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