R.E. appraisals are a problmem for many buyer and sellers today.
They are usually too low and there are limited ways to contest the fair market value that is proffered.
Appraisals for real estate in good locations are usually too low. Today there is little opportunity to contest the work of an appriaser.
Inventories of desirable real estate are in short supply. Sellers, buyers and agents feel some of the appraisal data is used improperly and does not reflect proper values. They are right.
Appraisals are based on comparable sales. The sales data is old. Historical data that is collected on sales within the neighborhood of similar type properties can be 6 months old. Appraisals are required by banks or investors when a buyer needs to get a loan to finance the property. Operative word is "historical" meaning in the past.
When agents take a listing in a hot market like Northern California they do so with an informed sense of the market demand. They know the competition. No one will make a dime, until the money is on the table and escrow closes.
Agents price homes to sell. Offers usually come quickly after a home is put on the market. Sellers frequently get offers at or above the listed price for a nice home because the available inventory is low and demand is high. Buyers are eager and will stretch to make a home purchase that suits them. Extra cash is offered.
Then it happens… the appraisal comes in lower than the sales price. The seller gets upset, the buyer feels like they paid too much. The bank will not make the loan. The relationships get strained. Again the guy with the money dictates the terms of the deal.
More than 1/3 of all residential sales are being delayed or canceled today because of problems with appraisals. This problem is so widespread that the National Association of Realtors blamed faulty appraisals for holding back the housing recovery.
Prior to the housing crash, a loan broker would order an appraisal directly from a licensed professional real estate appraiser. There were some personal relationships that developed. Agents shared information. It was in everyone's interest to work together and make the deal work if possible.
There were open lines of communication and a chance to bring information to the appraiser. Overlooked comparable sales, special circumstances that influenced a home's value like custom features, location benefits or favorable financing were shared. This was seen by some as having too much influence on value determinations.
Appraisers were the scapegoats in the last housing debacle. When home values were on the rise, banks saw the appraisals as almost an afterthought. Then things came apart and everyone in the residential real estate business started pointing fingers at anyone who rendered a service to the industry. Appraisers were an easy target.
The appraiser wants to work, the seller wants to sell, the bank wants to make a loan and the buyer wants to close the deal. No man can serve two masters is a Biblical principal handed down from ancient times. There are lots of inherent conflicts and subjective values that determine worth that come to a head when an appraisal report is prepared.
A new system was put into place after the housing crash. New regulations are in place that put a firewall between the real estate broker, the lender and the principals to the sale.
All appraisals come from an appraisal company, who employs appraisers that are queued up as orders come into the company. Now as employees they are sent out and submit their work through their employing appraisal company.
Appraisers are no longer independent. They are limited to communication with the parties to the transaction. Appraisal companies, mandated by government regulations have put barriers between the parties to the transaction. Conflicts, disputes and challenges to the fair market value are rarely mitigated.
Appraisals that are based on recent sales must use short sales, foreclosures and homes in need of repairs to compare what the market place is like. These technically are comparable, but it's like taking a 1970 era sports car and using all the ratty ones that need work and the pristine restored ones to determine what the property worth.
The current appraisal process is exacerbating the housing recovery everyone wants. It can takes months to close a sale. Prompt offers and delayed closings are a cause for appraisal issues that do not reflect current fair market values
Appraisers try to take into account market conditions like scarce inventory, bidding wars and sales terms. It is a worthy goal, but a true arm's length "present" fair market value determination based on old sales is a problem. Current trends effect value and cannot be documented with historical data.
Eager to make a deal and there are still problems with the appraisal process. Inexperienced appraisers working in areas where they lack expertise have been used. Some lenders require 6 comparable sales where only 3 are good comparables. No two homes are alike so subjective determination will always have an influence on values.
Real estate escrows are taking longer and longer to close. Due to bank restrictions, borrower credit issues, reservations, rules and guidelines, 30 day escrows are rare and 90 day closings are common. We live in the instant message age with present status updates every time we connect to the smart phone. In 3 months the market has changed.
Historical data does not reflect for present high demand, low supply markets. Right now there are willing buyers meeting willing sellers and making a deal based on old sales values. This does not seem to work for the banks and it doesn't work for the appraisers.
What must get done before the peoples' needs can be met? Lender requirements must change and unrealistic appraisal expectations need to be adjusted. Everyone is feeling the economic pain of the real estate market. It is people that make the market, people that create value and business that exists because of change in values.
Appraisers point out that unlike real estate agents they have no incentive or bias to help complete the deal. They just want to work. In an ideal world they would be able to gather data, reflect the current pace of the market and establish a fair market value that everyone could agree on.
What is happening to values today can be observed, but it is hard to give a data point for the present using bygone sales. Appraisers are no longer independent and able to communicate effectively with the parties to the transaction. Appraisal companies, mandated by government t regulations have put barriers between the parties to the transaction.
Once again the appraisers are caught in the middle, being pushed by government regulators one way and conflicting demands of the market place in another. So if you are selling or buying be prepared for an appraisal that might surprise you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am a long term real estate investor and broker.