Appraisals killing deals in many markets
What to do if value comes in below negotiated price
By Dian Hymer, Monday, May 11, 2009.Finding the right house to buy is never easy; selling a home today is also challenge. It's best to prepare yourself for obstacles that could cross your path so that you're prepared should they arise.
In some markets, one in three transactions doesn't close. This is a high ratio compared to the fallout ratio in previous years when the housing market was stronger and financing options were plentiful. In past years, most transactions fell apart over inspection issues. The biggest hitch today is financing, which is not to say that property defects don't come into play.
For some time, lenders have tightened up on their qualifying criteria, making it more difficult for buyers to obtain the financing they need to close a sale. Recently, appraisals have become problematic, particularly in low-inventory, higher-priced neighborhoods.
There are three components to lender approval. The borrower must be financially qualified. This requires a good credit score, sufficient cash for a down payment and closing costs, as well as verifiable income. The lender also needs to approve a title report on the property to confirm that the seller has marketable title to the property. And, the lender needs an appraisal of the property to confirm that the buyer is not overpaying.
Previously, lenders' underwriters required three comparable sales in the area that occurred within the last six months to validate the purchase price. Due to the soft housing market, lenders now want to see comparable sales information on listings that sold and closed within the last three months. The listing inventory in some areas was very low from December 2008 through March 2009, making it difficult for appraisers to come up with enough comparable sales information to satisfy the lenders.
To complicate matters, some appraisers and lenders automatically lower the appraised value by a certain amount if the property is in an area that is deemed as a declining market. This can result in an appraised value that is lower than the price the buyer and seller agreed to in the purchase contract.
HOUSE HUNTING TIP: What can you do if an appraisal comes in under the negotiated price? Your agent should talk to the appraiser to find out which properties were used as comparable sales. Your agent might be able to provide the appraiser with comparable sale information that can support the contract price, particularly if the appraiser is from out of area. ...CONTINUED
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Submitted by Jon Astaris on May 11, 2009 - 8:06am.
Talking to an appraiser about which comps s/he used in a market where there are no qualified sales would be deemed right off the bat as an attempt to influence value which is now - a felony? If it aint yet it's going to be soon. The country we've become needs scapegoats. Talk to an appraiser, you're it.
Submitted by Barry Noble on May 11, 2009 - 9:43am.
I am sorry. I can't believe Inman printed this. What an unconscionable article in today's Market. I respect your opinions, but one of the biggest problems has been Lenders and others attemtping to talk appraisers into values they want to see to assure loans go through. How dare you advise real estate agents to call and try to talk the appraisers into using (sic) "better comps". Better check the new regulations on that one.
Yes, the values may be lower - the appraisers have to look at the market in a declining cycle and offer advice now on the actual market conditions (thus the new required Market Conditions addendum 1004MC). This form reviews the market for 12, 6 and 3 months back and clarifies where the market is, and asks for commentary on the near future market conditions.
What you should bring out is the use of the new Appraiser Management Comnpanies (AMCs) that have been mandated for use by lenders who work on loans later guaranteed by the Federal Government (Fannie and Freddie) - where the supposed middle company was to keep the appraiser anonymous - unknown to the lender, to avoid lendere infulences on the appraisers. What this has spawned, are companies owned in part or wholly, by subsidiary companies of the actual banks and lenders, so they do know who the appraisers are and can control who gets the work, and the AMCs take not only (for the majorrity) from 1/3 to 1/2 of the appraisers fee for "services rendered" passing work through to the appraisers, but they have made working conditions so impossible, they declare "fines" against the appraisers for not getting the result in within, say, 24 or 36 hours, can fine toe appraiser for not making "any changes" ordered by the AMC and/or refuse the pay the appraiser if the results aren't to the AMC's liking (thus that of the bank in many instances. The Mercury Network is about the only one I have found so far that doesn't cheat the appraisers. A lot of excellent appraisers will drop out of apraising in the near future if they are to be expected to do their work for up to half price, with aded research and added work needed with all the new regualtions, and no better protection from influences than before all these new regulations. What you'll end up with is a worse situation than we had during the Savings and Loan debacle of the eighties.
Many agents see their commissions only - in a slow market where they haven't the multiple sales of the "good" recent years -and some have tried for years, even in the good times, to control deals to gete loans through, no matter the consequences. It is not the appraisers, but the agents who should be taken to task - in a declining market - why should the bank be given false values so the loan will go through - knowing the house that is about to be sold for, say, $260,000 will probably drop to $220,000 within the year, once all the foreclosures that are hovering in the background, come on the market in a flood.
I think you should write a follow-up disclaiming the article's contention that agents should call appraisers and try to teach them their work with "better comps" in the area. The Appraisers have access to the comps and probably discounted them for umteen reasons that make total sense in the appraisal process. The Market continues to decline in many major markets, and will continue to do so through at least this year. No the appraisers don't need agents calling, to try to get them to change their already researched and usually well thought out and illustrated estimated value opinion.
ps: I am a State Of California Certified Residential Appraiser AND a R.E. Broker, of long standing.
Barry Noble
Palm Springs CA
www.mypropertyisWorth.com
Barry Noble
Submitted by Melanie McLane on May 11, 2009 - 1:02pm.
Barry is exactly right! In some markets, the decline rate is breathtaking, as these markets correct. Don't blame the appraisers--that is shooting the messenger. And don't say that because you have a signed contract, that establishes market value. Sometimes, you just say that 'two fools met--one for asking it, and one for paying it'. Like Barry, I have been a broker and an appraiser for many years. I have reviewed appraisals where the appraiser used 'better comps'--meaning superior locations, two counties away, etc. I've reviewed appraisals where the appraiser did not have comps, so simply made them up! Before you are certain you know more than the appraiser, check the educational and experience requirements to be an appraiser in your state--you may be surprised! In the meantime, we continue to allow people whose licenses are barely dry to go out and list a house and tell the homeowner what it is worth!
Submitted by Caterina Platt on May 11, 2009 - 2:45pm.
With all due respect to the author, I too am an Appraiser and Broker. What we often forget in the recipe of 'what makes a market, and what makes a true sale' is the part about the knowledgable buyer and seller as well as the willing and able buyer.
A willing buyer is one thing. If they are going to borrow the money, they still have to have the worth of the collateral supported by real sales comparables. Not superior homes, but true substitutes.
For instance, I'm a buyer that is knowledgable about the area AND I have a 780 credit score, solid employment history and significant down payment. There is far more weight in my willingess to pay $XXX,XXX for a property than there is in the party that is buying a circumstance that isn't available elsewhere. (read soft or favorable terms to a person who really doesn't have the purchasing power to go anywhere else) Many times, that is the party I find willing to pay more than the market will support. If that buyer had cash, would they still purchase that particular home at that particular price?
The other instance I find where the sales price isn't supported by the market is often a purchaser from out of the area. Simply not familiar with what they should get the property for, and too willing to purchase at the asking price perhaps due to moving from a more expensive market, or needing to get a property in a hurry before the new job assignment starts and the family arrives.
If the appraiser simply blew it due to lack of geographical competence, the agent has a true beef. If it's the old 'we have a willing buyer and seller' argument alone, and the rest of the market doesn't support the contract price, an agent that tries to get the appraiser to massage the numbers is way out of line.