Buying or Selling a Home? Why You Need to Understand the VA’s Tidewater Initiative
This is a true life, it happened to me, precautionary tale. I want to share my Tidewater story with future home sellers as well as buyers. Tidewater is happening more often in the current market than ever before. I want more people to become aware of the possibility of a Tidewater situation, in case it happens to them. My husband and I have purchased and sold a handful of homes during his military career. We’ve used both conventional and VA loans to mortgage our houses. In this example, we were the seller and the buyer was shopping with a VA loan.
Until a few weeks ago, I had never heard of the term, “Tidewater” as it relates to real estate. I was pretty familiar with both VA and conventional appraisal processes, but I never thought too hard about it. Every appraisal for each house we had ever purchased came in at the contract price or slightly above it. Convenient, huh?
Rent it or Sell it?
As we were preparing to PCS (military move), I was running around trying to find a property manager for our house. We purchased our house with the intention of renting it after we moved. We’re comfortable being landlords, but we prefer having property managers to manage our houses when we rent them out. In my PM search, my friend Lindsay Litton, Co-Founder of The MilHousing Network matched me up with one of her approved realtors. MilHousing Realtors are vetted and experienced. They also must do a specific volume of VA loan work too. In a nutshell, they know their stuff.
A “Hot Seller’s Market”
During the interview with my potential realtor, he presented a scenario for selling my house and one for renting it. He even brought a PM from a company within his building to present a case for renting. Both scenarios were really attractive. Even though I initially wanted to rent my house out, I couldn’t ignore the numbers presented in his case to sell our house. My decision process can be summed up in a future post, but I decided to go the sell route. I was ready to trade possible future cash-flow (and landlord headaches) for certain real estate profits.
He priced my house at 20% above what we paid for it, just two years earlier! Next he told me it would only be on the market for a week. At first, I was being a Negative Nancy and I was skeptical of how high he priced my home. However, he assured me that the market was hot right now. Inventory was low and the buyer pool was high. Was he just showing me these numbers to get my business? Would we just have to reduce the price later? He fixed my doubts by showing me recent comps in my area to back up his price. He ended up being partially correct. It was only on the market for four days when we received an offer at $5,000 above our asking price!
He did warn me though. Pricing the house at 20% above it’s last purchase price from just two years earlier was a risky move. I thought he meant that it was risky because it might be difficult to find buyers to jump to a higher price. No, finding the buyers was easy. My realtor was referring to appraisers being picky about a home that was priced for a strong buyer’s market. Even more so for house that had an offer above asking price.
Wait, I know what a Comp is, but tell me again
“Comps” or comparable sales are important when pricing your home. A true “comp” is a sale, not a listing, really it’s not even a pending sale, it’s a sale. When you or your realtor look for comps, they should be recent sales, in your neighborhood, and similar square footage as your home. They should also be similar in terms of bedrooms and bathrooms. Adjustments to comps can be made depending on other valuable features like number of garages, condition of house, lot size, views and special features like pools, age of home HVAC systems, roofs, and upgrades.
Conventional vs. VA Appraisal Process
The selling process was chugging right along. We had an offer, completed the inspection and objection report, and now we were on to the appraisal. The appraisal process is a little different with a VA loan as compared to a conventional loan. With a conventional loan, the lender orders the appraisal directly from an appraisal company of their choice. However, with a VA loan, the lender requests the appraisal through the VA’s online portal system. Then the VA assigns one of it’s VA approved appraisers in the local area to appraise the house.
A few days after the appraisal, the VA appraiser responded to our buyer’s lender that he was invoking “Tidewater”. Tidewater. What the heck does that mean? Sounds a little scary. In a nutshell, it means that the appraiser did not agree with the contract price. He appraised our house for less than the contract price. Less than what the buyer offered to pay us. How much less did he appraise it for? We don’t know and never will.
That seems unfair, right? It’s not meant to be. The Tidewater Initiative started in 2003 and was last updated in a VA Circular in July 2017. If the appraisal comes back short, the Tidewater process allows the appraiser to review additional sales data through comps and any other imperative market information that may support the original contract price of the house. Humans make mistakes, so Tidewater allows for additional comps to support a price after a VA Appraiser makes their initial judgement.
The Tidewater Process Explained
Once the VA appraiser comes back with a Tidewater ruling, they will notify the point of contact listed on the appraisal request form. It’s usually the lender or buyer’s realtor. That person then has 48 hours or two business days to get back to the appraiser with the appropriate verifiable sales comps. Remember that comps are sales, not listings or pending contracts. If a realtor wants to use their own pending offers as justification, they must be accompanied by the contracts.
In our case, the buyer’s lender and realtor told my realtor about the Tidewater situation. Luckily, they told him right away and he had plenty of time to pull comps to justify the contract price of our home. This is where I’m really thankful that I didn’t try to do FSBO (for sale by owner) or use some random realtor that had limited VA loan experience. Our market is heavy on active duty and veterans using VA loans. Although my realtor priced our house aggressively, he had the comps to back it up.
After the VA appraiser review the additional comps, they make their final decision on the appraised value of the home, the Notice of Valuation (NOV). Next, the NOV is uploaded to the VA portal. Lastly, the VA provides the Notice of Valuation (NOV) to the buyer using their VA loan.
Waiting on Pins and Needles
For a week I held my breath wondering what the VA appraiser’s final Notice of Valuation would be. It finally came back and it was $8,000 under the contract price. Although this wasn’t exactly the news I was hoping for, we were happy that the final appraisal didn’t come back at a value that would completely kill the deal for us.
Although I was sad to potentially lose out on $8,000, we would still make a considerable profit on the sale of our home. The rapid market appreciation and the original contract price was $5,000 over the asking price, which helped cover our loss.
In the case of a Tidewater situation, you have options, but you need to be prepared.
When a home is appraised for under the value of the contract price, the contract can’t be carried out as is. That doesn’t mean the deal is off, but the deal can’t go on as originally scheduled. Once the house came back tidewater, all parties have the option to walk away from the contract. We could have completely walked away from the deal, but likewise the buyers could have too.
- If buyer and seller are still interested in working together, the Tidewater process allows for all negotiations to start from scratch. While the contract price of the house can’t exceed the appraised value, we could have changed other terms like closing dates and seller or buyer concessions.
- We could have asked the buyer for concessions like bringing additional cash to closing or taking some appliances out of the contract.
- We could reduce the price of the home to match the VA appraiser’s valuation.
- Ask the VA for a Reconsideration of Value (ROV). Anyone involved in the buying/selling process can go back to the VA and ask them to reconsider the final appraisal due to error or provide new comps not used in the initial Tidewater process. My realtor explained to us that there is rarely a positive result in a ROV. He had only seen one once in his 20 years of experience. Plus, they often take a long time, we were were on a short timeline.
- Ditch the deal and wait it out. In three-six months from now, homes will probably continue to fly off the market at appreciated values. There might be stronger comps to support higher prices. Or VA appraisers might have a better command of the market and there will be less Tidewater determinations.
In a “seller’s market” why did we decide to go with option #3 and give up $8,000 that we lost to Tidewater?
Why I did the deal:
- Our close date was less than three weeks away.
- I already scheduled the movers.
- I already paid in full for the Air BnB we’d be staying in until we actually PCS’d (moved).
- Our market is very military heavy. The chances that the next buyer would also want to use a VA loan were high. We might have to go through this same situation with the next VA loan buyer.
- If we wrote VA loans out of our terms, we would limit a larger portion of the buyer pool.
- I was also nervous that the buyer might completely pull out. Afterall an appraiser had just told her the home she wanted to buy wasn’t worth what we were asking and what she was offering.
- Lastly, I just wanted the deal done. We still made a significant profit. I had to look at it financially and not emotionally. We were actually only $3,000 short of what our realtor listed our house for originally since the buyer offered $5,000 over asking price.
I talked through my situation with several trusted friends and family members. Some people told me to scrap the deal and others told me to just do it. So when I talked it out with my big brother, he asked me. “How would you feel if the deal fell through because you asked the buyer to bring additional cash to close?” I though about it for a second, and then I answered, “I would be devastated”. He told me, “Well, there’s your answer”. I have a lot going on with an OCONUS PCS (international military move) and I wanted this deal done!
- If you are buying or selling in hot or rapidly appreciating market, understand that Tidewater may affect you.
- Be aware if you are in a market with minimal comps or a very wide range of home pricing. That makes it difficult to provide quality comps to defend the contract in the case of Tidewater.
- If you are a seller in a market heavy with military buyers, I would recommend you work with a realtor that is very familiar with VA loans. In this case, my experienced realtor saved our bacon by providing supporting comps and a narrative, and doing it quickly.
- If you are a buyer in a market that is susceptible to being affected by Tidewater, I would recommend thinking through a few backup plans. Considering a conventional loan being one of them. If the deal didn’t go through on our home, our VA buyer might have run into the same issues on the next home she pursued.
- A lesson I saw though the buyer’s perspective is that for as much as I wanted the deal to go through, she probably did too. I imagine that she had already scheduled movers and thought she would have a place to call home in a few weeks. Tidewater situations affect home buyers as well.
The Tidewater situation is just one more example of the financial risks that current and future military homeowners accept when they buy a home. My story has a happy ending (minus $8,000) because both parties were still able to reach an agreement. However, if we hadn’t, both we and the buyer would be left scrambling, trying to figure out a new plan.