Given the rising inflation and increasing interest rates, it remains to be seen if the bidding wars, cash deals, no mortgage contingencies, and urgency to close have characterized the real estate market in the Hamptons will continue.
For instance, while the buyer’s obligation to close may not have been contingent upon financing, many chose to finance the purchase with low interest mortgages upon taking title. GIven the increase in interest rates, at what point the higher interest rates will cancel out the benefit of financing remains to be seen.
When it comes to financing a purchase by giving a bank a mortgage, historically, the most acceptable method for determining what a home is likely to sell is based on what similar properties sold for in a given area over a reasonable period of time, supported by a certified appraisal.
The definition of market value is set forth in the U.S. Department of the Treasury Regulation Section 20.2031-1(b): “Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”
To gain some insight into the subject, I spoke with a certified appraiser and an attorney.
Thomas G. Padden, Certified Residential Appraiser, Peconic Appraisals
JAV: In your experience, do you find that cash buyers who go to contract without a mortgage contingency order an appraisal?
TGP: I find that most buyers are pretty sophisticated about the market, at least within a reasonable percentage range. Rarely have I seen a buyer get an appraisal before making an offer on a house. With the limited inventory in this market, there is the “fear factor.” If I don’t make a deal on this home I might lose it. So in most cases, an appraisal is not going to add any benefit to the process. An experienced real estate broker knows value, and they discourage sellers from setting prices too high. But a seller who gets an appraisal has a good marketing tool.
JAV: What about situations where the buyer pays cash but finances to take advantage of the low interest rates?
TGP: Those deals go through the usual process of an appraisal. The lender turns the appraisal over to an Appraisal Management Company (AMC) that selects a qualified appraiser who has no interest in the value of the appraisal. This prevents the use of mortgage brokers with a vested interest in the value of the appraisal from selecting the appraiser. That was a practice that contributed to the mortgage crisis in 2008.
JAV: Does a private lender have to go through an AMC?
TGP: No. Private lenders can hire the appraiser. Bank appraisals are paid for by the borrower but they’re done for the bank. By law, if the borrower wants a copy of the appraisal, they have to request it from the bank.
JAV: Do you think the increases in mortgage rates will discourage cash buyers from taking out a mortgage?
TGP: I think it’s too early to tell.
JAV Commnet: In New York State, Appraisers are regulated by the N.Y. Department of State
Carl Benincasa, Esq. – The Benincasa Group, Water Mill, NY
JAV: From an attorney’s perspective, what are your views about the current market?
CB: To start with, the market has been incredibly active, and every deal has been very competitive. It’s a seller driven market. That’s why buyers are going to contract without mortgage contingencies. It makes their offer more attractive.
JAV: In those situations, do you have buyers who finance the purchase regardless of the fact that they paid cash?
CB: Yes. In about 90% of the deals I dealt with, the buyers assumed the risk of getting financing and took advantage of the low interest rates.
JAV: Explain the difference between a mortgage commitment and the funding of the loan with respect to the buyer meeting its obligation to close?
CB: The standard mortgage clause in the contract between the buyer and seller makes the obligation to close based on the commitment. If the loan isn’t funded the buyer would still be obligated to close. But it’s also true that the commitment comes with certain conditions which are dealt with. For example, one of the conditions might be that the seller has to sell his existing home. In my experience, the commitment has been tantamount to getting the funding. Having said that, I would take each situation on a case by case basis and make my client aware of the risks associated with his obligations in the contract.
JAV: Clarify the terms, “on or about” and “time is of the essence.”
CB: Those terms apply to when the parties to the contract must close. “On or about” allows for either party to request a postponement of the closing without being held in breach of contract. It allows for more flexibility. “Time is of the essence” is a date specified in the contract that if either party fails to close, may be held in breach of contract. In practice, which is better for the parties to the contract depends upon the circumstances. Going into the summer season, buyers are anxious to close. But you also have sellers who want to remain in occupancy for a period of time, and those we handle with post-closing occupancy agreements.
JAV: With respect to bidding wars, who handles the bids?
CB: In some cases when I am representing the seller, I handle the bids. I set a date and time when the bids must be returned and submit them to my client for consideration. In others, the real estate broker handles the bids.
JAV: In the early days of Covid, the process from contract to closing slowed down significantly. Has that improved?
CB: Yes it has. The biggest obstacle remaining is with the municipal offices being able to meet the demand. The buildings departments are overwhelmed. They do the best they can, but they don’t have the personnel to be able to handle the workload. I can get a title report in seven to ten days, less for covenants and restrictions. Getting permits and new and updated certificates of occupancy is another matter. It’s something I would encourage the town officials to look at.