24. HOME LOAN 101 – APPRAISAL TO CLOSE

SUMMARY KEYWORDS

appraisal, appraiser, buyer, lender, people, property, seller, house, pay, lending, roof, earnest money, loan, point, called, shortfall, money, process, rob, buy

SPEAKERS

Rob, Intro, Adrian

Intro  00:02

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian  00:42

Hello, future millionaires and welcome back to the get rich slow podcast. I am your co-host, Adrian Shermer joined by my fellow co-host, Robert Delevan. Hey, Rob.

00:51

Good morning.

Adrian  00:53

And today we are going to dig into part three of this little saga on the home buying process. And last night we left off, we had just done the inspection, we already under contract, obviously, we cleared the pre-approval hurdle earlier down the road. And you know, at this time, your loan in the back end on my side is going to be entering a number of processes after contract while your inspection is happening. If there were any missing documents, as we discussed, loan officer or their assistant is going to reach out to you and ask for updated pay stubs, bank statements, all that kind of good stuff. Proof that your earnest money has cleared your account which we also kind of went over a bit, setting some of that money aside. In a protected fund that title keeps control of so that it is protected from being taken. It’s being held by a third party as what I should say not protected from being taken. There’s not a bunch of earnest money, troll, troll party, right. And, you know, again, that’s really just there. So that if you just say, hey, I don’t want to buy this house anymore, just because which is insane. But it happens, then you’re out that money because you’ve helped you’ve made the seller pull their property off the market. Otherwise, if you have a fan financing failure, if the house gets appraised, and there’s an issue, and you can’t come to terms, something like that, then the earnest money is typically released back. I don’t think I’ve ever had, yeah, I’ve literally never had a seller lose their earnest money, honestly. But a lot of companies to mine included now offer protections against that, just in case, but it’s fairly rare. You really, you know, again, you have to kind of like raise your hand and say, hey, I don’t want to buy this just because right. So, let’s dig into that though. Appraisal is really where I want to kick this off, as we’ve been talking about Rob. And obviously we’ve been through a number of them, and you have the good fortune of being on the seller side and number times two as the lender I’m writing English exclusively buyer side representation. And though I may talk to a seller once in a while or seller’s agent, to kind of keep good communication, ultimately, usually on the buying side. So, what is an appraisal? Yes, appraisal isn’t an enormous report.

Rob  03:11

And it is a requirement for lending. The it is the process in which the property in addition to the well the appraisal, the appraisal is the process which the which allows the property to qualify for financing. It is the independent third party licensed bonded insured appraiser is going giving their opinion of value at a given point. And basically, saying that this property is checks all of the boxes or not to be a good credit risk for the bank. And frankly then or the lender. And ultimately you know, Fannie Mae, Freddie Mac, and the back-end mortgage-backed securities investments. Yeah, so it’s a standardized form. The it’s, it’s considered if you ask an appraiser, they will say this is a science, it’s not an art, although you ask a longtime appraiser and they’re gonna say yeah, it’s actually science and art together. But it is a report that takes usually six other comparable properties with like, like qualifications or similarities, and then adjust for any difference’s square footage, location, condition, good, fair, poor, you know, excellent, so on. And make those adjustments you know, two car garage versus one car garage versus three car garage versus four bedrooms, three bedrooms, all of those different things,

Adrian  04:56

with additional with regional adjustments, sub adjustments on those as well. Well, it turns out garage in the middle of a metro downtown area is way, way more valuable, of course, than somewhere where, you know, you’ve got just land aplenty, and it’s no big deal.

Rob  05:12

So, Iowa has different adjustments for, or I should, you know, I don’t want to pick on Iowa, right, um, let’s just say the suburbs, a three-car garage, you know, a third Bay in our Portland Metro market is generally worth between 20 and $30,000.

Adrian  05:28

Yeah, so that’s a good harm to the way you say third to the second garage is worth a certain amount is the third is a larger amount, because it’s unusual. So, there’s like there’s a rarity factor in some of the features as well have you as a factor, ocean front lake front? Or is it you know, accurate in a corner lot, whether you’re next to a major road, the noise, a train that runs through, all these things, in theory are going to be factored into the appraisal. But you mentioned it Rob, one of the key things is that they’re going to use six different properties. And so that’s where we’re talking science and art, I guess, is the way we’re going to describe this. There is a science to it, and it’s a pretty strict one, they are generally supposed to use the most recent sales, typically, these are all gonna be sales within the last three months, they’re going to be less than a mile away. You know, if appraiser doesn’t have to, they’re not going to stretch out their radius, because the accuracy is really dependent on you know, it’s like that old saying wrong side of the train tracks literally that can have obviously it has a difference in real estate values, the neighborhood, the schools. This page, this is a, you know, what usually 30-page report, it’s pretty expensive. And while there are portions of it that are boilerplate, it’s, it’s it’s not an easy job, I would say, because there’s a lot of data that you have to crunch. And they use software to do this now. But you know, as an appraiser, you got to go out and take pictures, there’s different appraisal levels as well, an FHA appraisal is more involved, and a VA appraisal is more involved than a conventional appraisal. And then one more layer, there actually are, and these are not super common in at least my experience, maybe some other folks are getting more, you know, we’re all kind of skewed by our own demographic that we ended up working with. But there are appraisal waivers even on purchases, right now, typically, it’s going to be at least a 20% down situation, it’s going to be a property that was either recently built or recently appraised as well, something that they’ve got system data on, will probably going to see the return of what they call drive by appraisals, where you do have a human being kind of just cruising by literally, or just making a walk through the house more to just make sure that the place hasn’t burned down or ripped a hole in the roof or something like that. But we’re gonna see more and more of this electronic valuation. I’m, I’m positive of it. That’s my prediction anyway, right. But it’s fairly rare because a lot of people don’t put the necessary down payment in and I will, I’m going to step in front of a potential myth that I could see forming, your mortgage company doesn’t really have the power to determine whether or not you’re going to get that waiver. That’s determined by and I’m not sure into this more in a different episode, but by an electronic system. They’re called D, u and LP, they’re Fannie Mae and Freddie Mac have electronic systems to underwrite loans. And that’s why I don’t know, this is kind of an interesting thing that we’re different lenders actually do often have to follow the exact same lending guidelines and rules. So that system, though, can give a waiver? If it does, we’re allowed to use it, if it doesn’t, we’re not allowed to question the robot, it determines, you know, it’s based off an algorithm really is the is the, the core of that, so that so that it remains subjective so that it remains, you know, or to remove the subjectivity from it, right,

Rob  09:08

independent third party, all of that, but depending on what type of appraisal, what type of property, what type of loan, all of these different things. It’s generally, historically it’s always been ordered after the inspection period is complete because people want to back out in an inspection period, they found huge issues or you know, couldn’t tackle certain things or couldn’t come to terms on problems with the house are sure

Adrian  09:34

exact $100 appraisal report for a property that you definitely weren’t going to buy after you got that inspection. So

Rob  09:41

depending on the market, you might have to for quicker closes for competitive properties, different reasons. You oftentimes have to actually order the appraisal basically on day one of the purchase. It’s usually due to competitive reasons, but at the end of the day, what you’re looking at is, okay, there’s your $800 appraisal, I hope you really liked this house because you don’t want to sync and $100 appraisal fees on five different properties that you backed out of during the inspection period.

Adrian  10:14

And you’d want to confirm this with your lender. But typically, you know, for example, we’ve had certain specific market conditions where appraisals got even up into the four or five, six weeks, this was insane when there was huge, huge volume pumping through turn times. So we would order appraisals day one contract hits, we’d order it, if the inspection failed out, and this is lender dependent, but I’ve, I’ve worked for a few different lenders where this has been the policy, if the appraiser doesn’t actually go out, they’re not going to charge you the full amount, they’re gonna, they’re gonna charge you some sort of like booking fee, 100 and 150 bucks, something like that. They’re gonna keep and then they’re gonna recoup, recover, return the rest to you, because, hey, they didn’t actually do the job, but you know, you locked up their time in, right.

Rob  10:55

So that’s, that’s the piece where, you know, it’s case by case. And we’d work with each individual client on that. And, you know, lender and realtor work close together on that side of things to make sure that we’re not, you know, spending the buyer’s money before they’re even getting into the house. But the idea is the appraisal has been ordered it, they go out, usually within sometimes a couple days, depending on volume in the market. Sometimes it takes a few weeks, but they go out, they appraise the property, everything looks good, it’s financial, there’s no holes in the walls, there’s no pause and

Adrian  11:31

take pictures of everything across the code. Right? One of the big code ones for us here is the strapping on the water heaters. Strapping for an earthquake, smoke alarms used to not be a thing. So, there were lots of properties that didn’t have it done yet. Yep. And then once they get sold, you know, that’s, that’s one thing about buying and selling a house, right? I mean, you kind of have that you’re, you’re now exposed to the new code, you know, you can get grandfathered in this stuff. But when you go to sell, now, you got to make sure that you’re up to whatever the county says is acceptable safety standards.

Rob  12:02

Same thing with smoke alarms. So that gets called out a lot because they’re not, you know, in every spot that they’re supposed to be bedrooms and so on. Oftentimes, that gets called out. So, the appraisal comes in. And there’s a few different scenarios, the typical scenario is let’s say it was a $600,000 purchase, lending was for you know, $525,000, whatever it was 75k down, which is pretty typical in our market for a you know, move up home or even some high-end entry-level homes, depending on what area and it comes in. And it was $601,432 that was the what the math worked out. Okay, we’re in contract is 600. Everything’s good. Everything was signed off. There are all the issues are taken care of. And we proceed to final underwriting and review and close. Great, okay, no problem, right? That’s typically the way it goes.

Adrian  12:59

Let’s err above value, exactly 95 plus percent of transaction

Rob  13:04

scenario number two would be Oh, it’s way above value. Well, great. Guess what? Mr. or Mrs. Buyer? All right, it came in at 625. All right, you got a good deal,

Adrian  13:14

still send us your information seller does not get to know this unless you tell them exactly. The appraiser is not going to tell him. And when we have that happen, we just let them know. Yep, it appraised at value, good to go. And we

Rob  13:27

got a great deal. And we pat ourselves on the back and everybody moves forward. And we look really closely at Hey, refi to get rid of that mortgage insurance if you didn’t prepay or whatever the case may be. So, every you know, everybody is a winner on the buyer side. The third scenario would be it comes in low and appraisal shortfall. Exactly. And the basically what the appraiser is saying, as the representative of the lender on the back end, the investor really is who they’re representing, is saying for whatever reason, and there’s a myriad of reasons, but the purchase price, the contract price is higher than the comparable properties that have sold within all of the rules, location, area, condition, all that sort of thing is less than what the contract crisis. So, let’s say it’s 10.

Adrian  14:22

And the report will explain why I mean, these are rad. I love appraisals. That’s a goofy thing to say, but they are. They’re just excellent data sets, right? It’s very clear and concise. There’s a lot of data though I don’t know if concise is the right word, but it will explain in detail why that property isn’t worth what maybe you were trying to buy it

Rob  14:43

right. So, let’s say again, the contract was 600,000. And the appraisal comes in at 590. In the state of Oregon and in most states to my understanding, there is a contingency having to do with financing that says if the appraisal comes in low, then or the property, you know the condition isn’t there, then all parties have the option to either walk away with full refund of earnest money, or to renegotiate. And the renegotiating part is always fun. On the buyer’s side, when I’m representing a buyer, I always look at as appraisal shortfall as an opportunity to get my buyer a better deal. So, let’s say it appraises short 10k. We go hey, sorry, wasn’t worth it. Here’s the 10k. You know, you need to lower your price from 600 to five 590 $10,000 win for the client, right? Absolutely. It’s generally not that simple. But that’s the start of the conversation,

Adrian  15:49

especially in a hot market where things are playing over. And there may be justifications there. And there’s some things where people are going to feel like there is some sort of undefinable, right, that the appraiser couldn’t have found that value, right? And one of the big questions that we get always every time there’s a shortfall, right? People go, well, the appraiser must be wrong. Sure, I have successfully proven an appraiser wrong, we did so last year, transactional have 1000 bucks out of it. Because you got to remember, you’ve got six properties that they’re using as an example. So, if you come up with a reason that you think they’re off by 1000 bucks on one of those properties, that’s only 1/6 of 1000 bucks, that you can really make up difference there, you’ve got to find some pretty big gaps, or you got to find a reason why the appraiser really missed their mark. Right? Not to say that that doesn’t happen. And not to say that I haven’t had much bigger ones. And I definitely have had some five figure ones. But it’s pretty unusual to flip these things, right. So that’s usually not the strategy we take unless the seller really digs in and says, hey, you know, I want to copy this report. More often than not, we do give a copy of the report when there is the shortfall like that. They want to see that proof. You know, you’re saying something like, hey, I want $10,000 off this property. And from the lending side, I just want to go really quick. I’m going to flip your example a little bit, Rob, I’m doing 60,000 down, okay, 10%, right. 10% is a is a milestone. If you put 9% down, you’re gonna be in a different financing term, it’s gonna be more like you would put 5% down. So, there’s this kind of buckets that we ended up in. And that’s why people end up rounding off to those numbers. So, if you had a $600,000 purchase, you’re putting 10% down, that’s $60,000. But if you have an appraisal shortfall, and the property is now worth 50 590,000, even if you’re still going to purchase it for 600. That’s the agreement you make the seller says I’m not going to budge, you got to buy it as it is, if you want to have 10% down that 10% down is now only 59,000. Right? But that 10,000 Is 100% your responsibility, right? So now your down payment is technically in the in the terms of what the technical term of down payment means 59,000, but you have to make up the gap of the shortfall, which is 10,000, which means you’re now paying 69,000 Plus closing costs instead of 60,000 plus closing, right? So that $10,000 shortfall, you know, the rough math of it is that you’re going to pay 90% of the gap on top of your down payment once you run all that math all the way through. But the long and short is that it’s actually yes, it’s exactly the difference. And then now your percentages are all shifted. Or you may at that time, I’ve had people who end up in that situation, they might go Okay, let’s go down to 5% down so that we get slammed by that. And I’ll just accept the negative consequences to my mortgage insurance rate and to my total payment, right? And for some creative lending can come in,

Rob  18:43

right. And unfortunately, you know, we’ve been able to do that. A couple scenarios. The one scenario we talked about last year where we got it adjusted $1,000, I believe the original, the original shortfall was $19,000. And we were able to get it adjusted from 19,000 to 18,000. Because we said Hey, comp number five is not as good as this comp up the street, you should have used this one instead of that one. And the appraiser, you know, being a human being right being questioned on what they’re an expert in, said fine, we’ll swap this one in, but I’m going to make these adjustments and you know, it’s 18,000. Now, here’s the beauty of it. When we’re representing a buyer, which is generally where Adrienne and I are working together for a buyer. We say great, okay, it came in 18,000 I was short in that particular instance, there was not a backup offer. We were not competing. And the seller said man and they pay they dropped the price by $18,000 they weren’t happy with it, but they did.

Adrian  19:46

Yeah, so let’s take an aside their real quick because this is a flex for you Robin I want to explain those listening. Miko, okay, why? Robin Adrian, why did you go to bat for the seller? Why would you try to argue that the house is worth more Money. It’s a show of faith. Sometimes we do these somewhat futile efforts. And that might sound like we just gave $1,000 away. But it was a sign of good faith to the seller. And I feel like in that transaction, I know that they were balking at that price. And they were saying, hey, this doesn’t seem right. We went to bat, we successfully struck, and we didn’t get a lot. But we got something and that, you know, that inch got us the mile that let them say, okay, they fought this they really put in, we even try to pull extra comps and stuff the effort was made. And it does turn out that yes, this house is worth less money than we thought it would. And I think it helps them accept that, you know, we at least met them not halfway, but we met them a little bit down the road, a few steps, at least in the journey. And that was, you know, that’s part of our job is to find what is really, you know, you don’t want people walking away feeling like they got screwed every time they’re on the opposite end of

Rob  20:51

a trance. And it was a sweet hinge point. And it started just from a you know, little negotiation nerdiness, right. It was, hey, these guys are stretching to buy this house. It’s not competitive, because the condition was fine, but not great. Lots of DIY, that sort of thing, which makes a house less attractive. And at the end of the day, we went back, oh, the appraisal came out 19,000, short to the seller. And the seller said, Ah, well, that’s terrible. And we said, By the way, from the get-go, we told you that this buyer was basically stretching to the point where they could actually get into this home, they do not have extra cash period. This is they’re spending every dollar for their down payment and for their closing costs. So, when it came in short, and we’d went through that good faith effort, and we got $1,000 out of you know, 19 went to 18. And we illustrated that effort, and it took a week to do that with the seller, the sellers going oh, you know, but I really got to sell this house. So, they said, Okay, fine. We know the buyer, or at least they, they felt that the buyer couldn’t make up the difference. And the situation was such that the buyer wasn’t, wouldn’t have been able to do it would have failed. And so, we had communicated that, so we negotiated a better deal for a client. On the selling side, on the listing side, of course, we’re going to do everything we possibly can, almost to the point of if we were actually representing that client, we probably would have said, you know, we’re gonna go back on market $18,000 is a big difference. But that client, you know, wasn’t at the point where they couldn’t do that. We happen to know that they were buying a home on the other side. So, it was one of those things that they made a decision that in a vacuum, they probably would have said no, I’m not going to take an $80,000 concession. But it was best for them because they had a purchase on the other end, one of the options at that point would have been okay, go reapply with another lender, let’s extend by another three weeks and let’s go get another appraisal.

Adrian  22:59

Yeah, that’s expensive. I’ve been on both ends of that process, right. And it’s very difficult to get a different value

Rob  23:04

it is. But you know, if it’s that much, and everybody wants to hang and try, and the buyer wants to get another appraisal, and the other $800 Then so be it you know, so there’s a number of different ways to go. But this brings us to kind of the next point is an appraiser. Even though there’s a science to it, there’s standard changes, like we said, you know, third car garage versus second, you know, two car garage, that sort of thing, per the area, they have all these standards. This is where the human element comes in, right? So, we staged for when we’re listing a home we staged for buyers, right? Make it look awesome. little hint when people actually live in the home and never looks like that. So, it’s one of those things where we’re going. Mind doesn’t Yeah, it doesn’t look like that all the time. But people buy on hope that their life will look like that. And it looks like that one hour before everybody shows up for Thanksgiving dinner. And then everybody shows up and you know, their kids and grandkids and everything else tear it apart. That’s why

Adrian  24:13

Virtual Staging is becoming so popular right now. There is you can create that austere clean look, there’s some ethical implications there too, because they can be done very poorly. But you know, buyer beware obviously read the fine print and be aware that some pictures online are virtually staged, largely fabrication. Oh, yeah. And they may not even make like geometrics spent since I’ve definitely seen pictures where it looked like they fit a king bed with room to spare and then you stand in that room and you’re just like, this is a closet, right?

Rob  24:43

But what happens is that appraiser is gonna walk into the house. We want that house to be serene to be picture perfect to be everything that it was. That’s a common

Adrian  24:53

question, right? Should I bake some cookies or something? Like do I need to impress the appraiser right, and appraiser will say no, we are apt salutary You know, so we removed the subjectivity of this process, it’s it’s an object robotic, you know, we’re gonna ignore the pile of trash in the corner, or whatever it is. Reality,

Rob  25:12

they’re still human beings, and you know, you walk into a place, and it smells like dog turds, or, you know, like, which

Adrian  25:18

dirty toilet does affect the value?

Rob  25:21

Yes, it does? Or does you walk in, it’s fresh, its clean, maybe cookies, maybe, you know, whatever the case may be, you definitely want to put the best foot forward for the for the appraiser. What ends up happening is, even though it’s all objective categories, and certain adjustments that the math has already done, there still is things such as like, excellent condition, good condition, fair, poor, you know, that sort of thing? Well, the difference between, you know, fair and poor might be a nice state shop. Yeah, you know, so different things like that. So

Adrian  25:55

just, I can’t see your carpets, then I can’t make a fair assessment of what condition they’re in there. And I’ll probably make an assumption. Exactly.

Rob  26:03

So, you know, if there’s a bunch of junk.

Adrian  26:07

Yeah, so I mean, I’ve done hoarder homes, it actually can get as bad as I had one where financing was denied. Because this was on a refinance, they said, this is a fire hazard, we don’t want to lend on this property. Because there’s just so much stuff here, someone’s gonna die if it lights up. So, we don’t want to touch it with a 10-foot pole. So yeah, cleanliness is a factor, I’m not gonna say it’s gonna make or break. And I think it’s a swing your value $10,000 by any stretch, but you know, it’s nice to have the rosy glasses on when they get into the house. Exactly.

Rob  26:38

So, the goal then is that it comes in at value, or your licensed broker will use it one way or the other, a hinge point, to your benefit. And we’ll fight like hell to bring it up. If we’re the listing side, and on the buyer side, we will, you know, use it to negotiate Oh, sorry, if your house isn’t worth what we thought it was. And there you go. There isn’t

Adrian  27:06

a couple of key points there, too. Rob, I want to make sure we touch on because we did talk about the strapping and the meters, but I want to hear your side as well. There’s a lot of patch stuff that is sometimes done before appraisals, that’s a great idea. Let’s say you had a leak, for example, they’re fixed the leak, but you still got the spot on the ceiling. Right? Now the appraiser can’t assume that that’s an old leak, so they don’t know and they’re not gonna take your word for it. Little stuff like that chipping paint on the outside is also another one. We’ve had. One of my, one of the neat ones I think’s kind of clever, is that if you have like, sometimes a lot of patches a floor or an entire room of a floor where it’s all what’s that flat wood? Oh, my God, I’m having a brain fart, you know, it’s just sub floors. Oh, right. Right. Yeah, particle board, particle board, whatever it is, you know, that is not a floor covering. But if you paint it even right, that is considered a type of floor covering, it might not be pretty, but at least it’s passable. So sometimes there is that that’s where having a good real estate agent can be a positive factor, if they’ve got a relationship with a handyman, and they can get a little bit of work done. Rob, I know you use you guys have your own general contractor in house because of how big of a deal this is. But there are little tweaks that you could make, if your head got an electrical panel, and that, you know, the plug socket, and that cover got smashed, someone you know, bumped into it on accident, that’s technically exposed wires, right has to be covered, right. And if that gets called out, you’re wasting the buyer’s money because they got to pay on 150 bucks usually or so, right? To have the appraiser come back out and take a look and make sure that was done. And you’re also just you’re not giving your house you know, for what are the 87 cents at the hardware store? Right? So do a sweep, you know, look at your house as though you were an appraiser if we can give you advice from the selling side, right from the refinancing side. Those are the things that we just see snag people up sometimes it’s just like, man, you could uh, you know, you got the plug dangling out of your fire, smoke detector, you know, we can tell you yank the battery out of there. And I know you why you did it, but just put it back in, right, you know, for this moment, at least, so that we can make sure that it looks right, I had one recently they had shut the hot water off to the house because they charge you. Even if you don’t use the gas, they charge you to be hooked up, right? These folks that just moved out. And the agent didn’t you know, make sure this is one of these double checks you should do before you clear a house for sale is make sure because the appraiser had to check and make sure that there was running water because that’s a code thing. There has to be running hot water. How can you test the appliances and everything if you don’t have that, and they will test the appliance?

Rob  29:42

Yeah. And they’ll it’s really you think it’s common sense. But there’s so many times that we see either, you know, the real estate broker wasn’t there never at the property or was just, you know, casual in that They just didn’t look around. So, there’s, there’s a lot of pieces there a lot of pitfalls, you want somebody who’s engaged, looking at it from an appraisal standpoint, at the end of the day, the vast majority of transactions are not cash. They are, you know, going through the lending process, and the appraisal is a huge, huge pivot point. It’s also a huge opportunity. From a negotiation standpoint, listing side, buyer side, you know, all of those things. And frankly, there’s a number of hoops to jump through when it comes to that. So, you just, you just have to have the savvy to see the pitfalls ahead of time, you know, an ounce of prevention, you know, a pound of cure, so on and so forth. All of our grandparents are, you know, celebrating because we listened, apparently,

Adrian  30:49

when we’re absolutely, absolutely. So just being ahead of the game is and then the other piece of this, the appraiser can also call out repairs beyond, we’re talking about some pretty light stuff. But my favorite extreme for some reason is always the hole in the roof, because it’s just funny to me. Although it’s not funny, if that happens to you, it can be a serious and a compounding problem. Water is one of the most dangerous things, the value of a house, you know, electrical, obviously, you can have a fire, but water will destroy things on. I mean, if you’ve never been through an event like that, or you know, had a house have something I mean, my mother’s washer went out, she ended up getting an entirely new kitchen, because it ruined the base of all of the cabinets when it spilled out into that space, floors, sub floors have to be replaced, there’s a lot of things that are made of wood that you can’t, you just can’t unwrap do the damage that water does in a pretty short amount of time. And a lot of times this stuff happens when someone’s not home. That’s why I’m a big proponent of some of these newer technologies for 1020 bucks, you can get a Wi Fi based sensor that will alarm you if water hits the ground and

31:56

put it under your shirt. And it’ll come to you. So, lots of

Adrian  32:00

we have one of these repairs, called out by the appraiser. That is a financing contingency. And remember, appraisal management companies, although they are sometimes owned by the same parent entity, they are separate companies, and they don’t work for the lender, they are contracted by the lender to do this as a third party similar to how Title operates, right? We want that separation, that’s a deliberate design within the lending process, to again, remove that bias, you know, if I want to keep my lender happy, because I don’t want them to book me again, then I’m going to want to give them the value they want. That’s not a good thing for this process, we want that that subjective view. So, let’s talk about that. Rob, you know, the appraisal comes back, I’m gonna show you that text, hey, man, we got value, but they say the roof needs to be replaced, right? That’s a big dollar. Right?

Rob  32:53

That’s, and it’s a big deal. And at that point, it’s, again, it’s a hinge point, depending on who you’re representing. Generally, speaking of representing the buyer, we say great, we’re going to squeeze you out of the cell getting a new getting a new roof, or at least, you know, some serious repairs, we’re gonna get certifications, we’re gonna get different things. It just, it just depends on the situation, but there is it becomes a hinge point of the buyer is going to get some additional value. Now, they didn’t necessarily know that the roof was completely shot. But you know, it’s, the lender won’t want to prove it because the appraiser called it out. So, we’ve had situations where the on the listing side where the buyer actually or the or the appraiser I’m sorry, said oh, well, we need we need a roofing cert, and it has to be signed off by an engineer or by the local government. And because you know, it looks like it was replaced

Adrian  33:57

in the last at least three years left on exam, for example is one of these,

Rob  34:02

or they want to see that. And we’ve had a weird situation where oh, it looks like a new roof. Where was the permit for it? Well, most general contractors licensed bonded insured, if it’s an existing roof and they’re tearing it off, put a new one on, they’re not going to get a permit for it because they don’t need them. The local municipality doesn’t require it. We’ve had weird situations where an appraiser actually called it out there said it was a new roof therefore an underwriter then said, oh, well, we need a permit. Obviously that underwriter didn’t really know housing very well. But you know that became a problem. So, there’s a number of things like that. But the bottom line is, is when these things pop up, we’re going to use them to the advantage of the client as much as possible. On the buyer side or on the seller side. We’re going to mitigate them as much as possible by getting expert opinions, getting bids on what it would cost to make it last say you know, say roof to last five more years versus replacing the whole thing. And of course, you know, I’m gonna be some repairs

Adrian  35:06

just have to be done. Sometimes that’s just it. That’s what is done, there is no patch job available. And as you can imagine replacing a roof takes a long time. So, what happens then what if, what if we do need a new roof, some of these repairs, if they’re smaller, do have to get completed before closing, this is one of what I would say was one of the more common reasons that the closing might be pushed, and one in five closes, happen beyond the original contract date. And this is part of that, because this kind of negotiation comes up, and then we have to move the ball. So, I always tell people, you know, you don’t have the house until you got the keys in your hand, don’t get too in love with that close date, until especially the appraisals really one of those big milestones, I feel like that that can cause a shift, right? So, it’s kind of a sigh of relief. Sometimes when we get past that if we’ve got underwriting decision, you know, and its minor stuff, and we have an appraisal that’s clean, where the odds of this thing closing on time and closing it all go up astronomically, those are a couple of the more, you know, those are where issues crop up. So that’s why we try to get it done as early as possible. So go ahead and hire movers at that point. Yeah, at that point, you know, you should be good, right? If it’s going to be something that’s going to take longer, there also is, and I’m not gonna go too deep into this, because different lenders have different rules on this. But there is a seller hold back as well, right. And so, what that means is, if the roof costs $10,000, typically, maybe 12, and a half to $15,000 is going to be held of the money that they would have gotten at closing, they’ll still get all the rest of their money. And then this will sit in an escrow account that’s held by the lender, and then they will directly pay the contractor who has made the bid for $10,000. And let’s say there’s a bit of spillover as often happens, that’s why they hold more money, right, um, it actually ends up costing 11,000, because they yanked off the shingles and found out they had to redo some of those boards, then, not a big deal. Once it’s done, the contractor gets paid after the appraiser, no time is booked, and everything for that revisit to make sure that it’s confirmed is done. A licensed bonded contractor can’t be you know, your Uncle Larry is going to do the roof for you, but I’m not gonna fly, even if he’s bonded, he’s related. Usually, it’s got to be someone who’s a separate entity like that, definitely not gonna be a person who bought the house. And then the remainder of that 4000 bucks would go back to the seller, so the seller would get that money at the end, or that can sometimes go to the buyer. So that’s on how it’s negotiated. And but there are options, you know, that doesn’t have to be a deal killer, or that doesn’t have to necessarily mean that you can’t get the house, you could get the house and the roof could be done. Week two, that you’re in there.

Rob  37:39

Right. So, to finish can be a windfall. Exactly good

Adrian  37:43

thing, we’ve seen it be a win for people, yeah, a number of times. So don’t let your heart sink too much. If that occurs, just you know, let it play out. Keep your wits about you,

Rob  37:53

right. And then so the final piece, then let’s say the appraisal or appraisal goes through one way or the other, and your repairs that are required or have been negotiated and are done or getting done. And you’re in final underwriting approval. And the last few steps

Adrian  38:10

of this transaction. Yeah, so underwriting is a multi-step process. As we’ve talked about preapproval, there should be some underwriting in there, if you got a good loan officer. Unless you’ve got a super, super simple financial situation, which happens often. I mean, there’s times that I don’t have to, you know, run through a pre underwrite because I know that we’re going to be safe. Then we will have an initial underwriter review. So, the underwriter actually takes that electronic version that I was talking about, and they use that rule set, you can look up these rules, by the way, you want to look up the FHA rules, the handbook has over 1000 pages, its public knowledge, it’s online, you can download the PDF, just google search it right now and have it’s a fun light read. It’s known it’s awful, but you know, it’s thick, it’s super thick. And that’s the point of these electronic systems is to narrow it down to your scenario and get the conditions that we need. So, you’ll get a conditional approval, and one of those conditions will be an appraisal. And then there might be other ones on there, and depending on what they are, you know, this can be a multi layered discovery process and I’ve had some people say they feel like they’re under trial. You are under trial, you are borrowing six figures, this is a pretty serious deal. This is not you know, a Discover card without $10,000 limit that’s not that much money compared to this. And people always ask me, you know, like, hey, but they’re gonna get the house right. So, like, what’s the big deal if the house is worth this much money and I’m putting five 10% down, they can definitely sell it for that much money. That’s the thing. Foreclosure is awful for everybody involved on average foreclosure cost the bank over $70,000 They lose money on every single foreclosure is no such thing as a profitable foreclosure. I’ve never even seen or heard of one. I had friends that worked in foreclosure. It’s bad press for the bank. It’s just not a pathway. It’s just not a real option. They want you to pay on your loan. They want to make sure that you can pay on your loan, and they want to make sure that they follow all the rules because as a lender, we’re going to sell that debt, it’s going to get wrapped up in mortgage-backed securities and get sold. And if we don’t fit in that box, that’s going to take up a parking space on our lot, I’m gonna use the car lot analogy, right, so I can sell less cars now, because I just had that spot blocked off until that person refinances pays this loan off, whatever it is, or it’s going to shrink, and then maybe I’ll get a little more room. So, the ideal to keep that machine moving,

Rob  40:26

right, banks don’t want homes, they want loans that are being paid, and they do not want a portfolio. It’s just more profitable for them as a business model.

Adrian  40:36

So, every time you send something in, there’s a possibility that we’re going to ask for another thing. Because of that, let’s be ready for this. Sometimes this bounce back and forth is literally 15 touch points, I’ve had that happen. Other times, it’s been one and done. We’re just waiting for the appraisal, and the appraisal comes in. And those are sweet, they feel good. We make every attempt, there’s no win for us in having to keep coming back to you for conditions. Nobody likes doing that. And I’m just going to throw out there. If you have a loan officer who asks you for something that they’ve already asked you, you’ve already sent in. Just remember, they could be a technical problem, maybe upload didn’t complete properly, you might have been missing something. I’ve had people send me something repeatedly yell at me. And then I finally say, hey, go ahead and open that file is blank. There’s nothing in there because the scanner didn’t work, right. You know, so make sure that you’re looking at your files before you send them. I’ve also gotten page 135. You know what I mean? Like, yeah, they missed the back, because the scanner doesn’t scan the back, right? There’s a bunch of little things that can just waste tons of time, just communicate with the right people that you’re working with, make sure that you keep open lines. Ideally, your loan officer, their job is to chase after you for this stuff. But you don’t want to slip through the cracks. And then it doesn’t matter whose fault it is, you’re not closing on time. That just sucks. So be aware during the process, be responsive, be ready to provide these things pretty rapidly. And then yeah, so we have initial conditional approval, because you’ve got conditions right, or we need the appraisal, we need this, we need that from title, a lot of the conditions are going to be stuff that comes from third parties too. We talked about getting a homeowner’s insurance policy and get your quote really, really early in the process, right? If they can slow you down, we just had someone denied for a homeowner’s insurance policy for real crazy reasons. So just get that done nice and early, do your shopping nice and early for some of that stuff, or checking those boxes off as quickly as you can. And then if the appraisal comes in, we have final underwriting approval, the underwriter is really saying hats off to you are clear, we’re gonna give titled to go ahead, right, it’s gonna be a balancing process where we make sure all the money makes sense there, right?

Rob  42:39

Every penny all the way down every penny, right. And you know, that’d be earnest money and lending expense and commissions. And

Adrian  42:48

what you might be paying for the rate, I’m not going to talk about locking in right now, because that’s an entire conversation, yes. But in that process, you are going to lock your interest rate, right, typically, for better for worse, whatever the market does, after that, you’re going to be enough that pricing, there’s float down, that happens, there’s some other stuff but will chew into that in another episode, where we talk about how this lending can be actually super flexible compared to other financing products, you know, I can’t pay extra when I get my car loan, to get a lower interest rate you can when you buy a house, right? Or you can do the opposite to generate credit to pay for closing costs that you otherwise maybe can’t afford or don’t want to pay. So, lots of flexibility there. But let’s assume you’re locked in your square, we know what the closing costs are, we’re subtracting the seller credit from that we know what your down payment is, you’ve already got your earnest money in there. So, there’s gonna be a final balancing between your lender and the title company as they confirm and whittled down, you know, daily interest and state and government recording fees and all the little sub costs that add up to that $1,000 closing cost,

Rob  43:46

right? All those things.

Adrian  43:48

And now we’re gonna say, hey, this is the remainder, this is what’s left over after we subtract the earnest money that you’ve already put in. That’s what we want you to wire to title typically. Some people will do it as a cashier’s check can’t be a personal check, though, right? At least not an organ, right.

Rob  44:04

And then at that point, you’re settled to close you go in, you sign all of the documents, we won’t go into the 100 pages that you have to sign. But on the lending side, that’s where a lot of that comes from. But it’s also you know, your title and different disclosures and you know, a number of different things. And then at that point, it goes to title or and escrow will basically pay off previous loans, they will transfer title over, make sure everything everybody gets paid, they’ll take in all those funds exempted and they will distribute the person out to each person and then needs to get paid usually seller, their loan holder, sometime midafternoon. If everything was done in the morning of that business day, then you’ll get the call that you actually have been recorded with the county and you now have title of that property. And that’s and that’s the end of the process. Now at that point,

Adrian  45:00

I would argue that normally that’s a two-day process. Generally, I would say that the typical unless you’re really like back up against the ropes, they’re going to try to do the signing with you the day before. So, they’re signing where you’re, you’re signing off what you’re going to do, and especially if it’s the day before, there’s a lot more flexibility, they can often do a mobile notary for a fee. They’ll come meet you at your house, your job, whatever it is coffee shop. And, and then they’ll start the process of sending money all over, including yours, your wire that’s coming in, and then the next day, all of those wires clear. And that’s considered funding when the when the money comes from your bank specifically, that’s, that’s a funded loan at that point. And then there’s recording, as Rob mentioned, so the county is actually going to record and say, officially, yes, that’s when you know, ink hits the paper, and you are in the public record as the owner of that property. Right. Right. And that’s probably one of those that’s truly keys in hand at that point, in theory, mentally at least, you know, there’s nothing that can stop the transaction at that point. You own that house, and then rob

Rob  46:06

the will and then the party starts. Right. And when I say the property’s gonna call you up is, hey, guess what? You own another house? And or one less house depending on which side you’re on. And, and then the real work starts,

Adrian  46:19

which is everybody’s gonna move, right? Yes. whole, whole nether conversation. Unfortunately, I don’t and then you hire movers. Yes, absolutely. So just hire movers just like the greatest. All my years in this industry. My biggest piece of advice, please just hire movers. It’s not worth it. You only got one back.

46:40

Exactly. And you

Adrian  46:42

know, and you’ll drop and break one thing and go up. That was that’s the movers right there. I could have had just like, one less thing. Yeah, we all kind of have to learn but definitely, as you’ve got a lot of lifetimes Pat Exactly. overs become more and more valuable.

46:57

Exactly. So

Rob  46:59

yeah, it’s a fun process. We love it, there’s, we’ve dug into a lot of the nitty gritty, there’s so many other details in the process, and so many left field items, but hopefully, this little three-part series will kind of walk you through what to expect to a certain degree, and then, you know, rely on your professionals, they will create the ones for you.

Adrian  47:22

So that’s one of the hardest things about recording this with you, Rob is you and I both I think it’s hard not to go down all these little pathways, because you’ve just seen so much. And like I said, FHA handbooks, 1000 pages, right, that’s 1000 pages of rules, just for one of you know, a dozen different loan types. Realistically, there’s lots of stuff that we’re not going to be able to cover here. And that’s why it’s important at the beginning of this process to really be strict about how you hire the professionals for this. And I say hire I mean, you know, your buyer, your agent, as a buyer, that’s paid out of the seller’s pocket in theory, but you’re responsible for them getting paid, right, you are the client, and then they don’t get paid unless it closes. So, the system is, you know, it’s got its pros and cons, but I feel like it’s designed in such a way that the reward is there on purpose at the end, we’re all in it to win it, we don’t get paid anything for all that time we’ve invested unless we get us to the end of the transaction. So, it’s, it’s in our best interest to make sure that you are going to get the loan, that the house is up to snuff, that you are offering a fair price that you are not going to have an appraisal shortfall. These are all the kinds of considerations that are just normal day to day for us. But you know, take experience or to now I could never teach I couldn’t just sit someone down and teach them everything that I know, I don’t I don’t even know all the things that I know they only their situational as they come on, I know or I know who to go to, to find the right answers. So, try to grab someone with some experience. I don’t want to shoot these guys in the foot who are out here, you know, fresh face trying to get it, but I’ve seen it out there. I’ve seen people trust their family members who you know, are real green. And it’s, you can be lucky, you can have a simple process, you can have no appraisal shortfall. And then it’ll seem like they did a really great job. But a lot of the times those of us who do this for a living. We know that. Yeah, there’s a degree of knowledge that has to be there. And if you’re really good at it, it won’t seem like you did anything, right? Because you’re gonna make it look easy because you, you’re not scrambling every time. something abnormal happens, right?

Rob  49:32

We’ll look at it as opportunities. And the biggest thing that we have to remember, we do this every day to make a living and it oftentimes becomes you know, oh, hey, I’ve dealt with that before. And here’s how we’re going to deal with it. every once awhile, there’s a left field thing and it’s like okay, we got to figure out how to deal with it and our core values will dictate how we do that. But yet, at the end of the day, we always have to remember is every single close for that Client, it’s for it is a life change intersection for them. Yeah. And that’s the piece is for us. Okay, it was run of the mill, we did great. You know, with multiple hinge points, we provide a ton of value. You know, we’re creating everyday millionaires every day, right? But in the real estate realm, but, you know, huge, huge pivot points for them huge value. And, you know, that’s what we’re here to provide. So

Adrian  50:28

it can be tough this one can be I mean; we get emotionally invested. Oh, yeah, it happens. Here’s I’ve been shed for clients. It’s, it’s tough. It’s, it’s a gripping thing. But it’s also one of the most rewarding things about my career. I mean, is we get to help people move to that next Echelon and revisiting with them and the 510 20-year mark, after you’ve worked with someone, not me. But Rob, I know you’ve got some clients that you’ve worked with for literally decades at this point. It’s, it’s a meaningful thing, because you really get to see, it’s called the get rich, real slow podcast, for a lot of you guys build wealth and real estate is part of, I can’t think of a single person, you know, who we’ve talked to about these kinds of things, the financial aspect, who that’s not part of their portfolio, you get to borrow money to buy an appreciating asset that’s as good as it gets. So, get yourself in front of it, get yourself a team, follow all these extra steps. Don’t skimp out on something like an inspection, or shopping around a little bit, taking your time to make sure you find a professional interviewing people, making sure that your vibe, I almost think it’s better. You know, I would say that having a connection with your real estate agent might be more valuable in some ways than experience and in a lot of ways, because you’ve got to be able to have honest conversations with these people. And just don’t be afraid to ask these questions. This is way too important of a transaction to go. I’m nervous. I don’t want to upset somebody. Make the phone call find out what’s going on. Talk to your professionals. Exactly. Our job is in my opinion, maybe even more to educate them to know so.

52:00

Yeah, yeah. Love it.

Adrian  52:02

Well tell if you enjoyed this little three parter. This was a fun one. Yeah. We’ll catch you guys out their next time on the get rich, slow podcast. Thanks so much for joining us. Have a good week out there. Thank you all.

Intro  52:13

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